What Is Private Mortgage Insurance (PMI) and How Do You Calculate It?
Buying a home can be both exciting and stressful. For first-time homeowners, one of the biggest concerns is often the amount of money required for a down payment. While a 20% down payment is standard, fortunately, there are options for homebuyers who can’t afford this. Private mortgage insurance, or PMI, can help you to purchase a home with fewer out-of-pocket expenses up front. There are pros and cons to going this route. Dominion Energy Credit Union can help you weigh your options and determine if PMI is the right move when buying your home.
What is Private Mortgage Insurance?
When you put less money down, your mortgage lender incurs more risk, so PMI is required for down payments of less than 20%. PMI may also be required if you are refinancing and your equity is less than 20% of the value of the home.
PMI is typically arranged by Dominion Energy Credit Union and provided by a private insurance company. It’s meant to offset the risk to your lender in the event that you can’t pay your mortgage. To secure PMI, you’ll need to pay an insurance premium up front, along with monthly payments (in addition to your mortgage payments). PMI rates in Virginia can vary by private insurance lenders. The premiums for PMI are tiered based on risk factors, such as your loan amount, purchase price and credit score.
Types of PMI
The most common way to pay PMI is along with your monthly mortgage payment, although some insurers will let you pay a lump sum up front. Explore two different types of PMI and speak with a loan officer from Dominion Energy Credit Union to learn more about the options available to you.
- Borrower-Paid Mortgage Insurance (BPMI): With BPMI, you pay your insurance premium as part of your monthly mortgage payment. Once your loan principle reaches 78% of your home’s value—and you have 22% equity in your home—your lender will perform an automatic review to determine whether the BPMI can be canceled. Speak with one of our mortgage representatives for more information about BPMI.
- Lender-Paid Mortgage Insurance (LPMI): With LPMI, Dominion Energy Credit Union pays the premium up front, while you pay a higher interest rate on your mortgage to cover the cost. LPMI may afford you a lower monthly mortgage payment than BPMI; however, it’s important to note that LPMI can’t be canceled, and your rate won’t go down over time. Since LPMI is paid as interest on your mortgage loan, it may be tax deductible (always consult a tax professional to discuss your specific situation).
Consider Other Types of Loans
No one wants to spend extra money on a mortgage. You may want to consider an Adjustable-Rate Mortgage (ARM), such as Dominion Energy Credit Union’s 5/5 ARM. Adjustable-Rate Mortgages offer a variety of advantages that Fixed-Rate Mortgages don't offer, such as:
- You’ll start with a lower interest rate, which will fluctuate with the market every five years in this case for the remainder of your loan term.
- As your interest rate adjusts, this will affect your monthly payments, potentially saving you money.
- No PMI required with a down payment of 10% or more
Another way to avoid paying PMI is to save a bit longer so you can put 20% down. Dominion Energy Credit Union can help you build a budget and explore opportunities to save with our savings accounts, money market accounts and certificates.
If you’re ready to buy now and would prefer not to wait, PMI can be a good option. While it may be an extra monthly cost, it can help make your Virginia dream home a reality. To learn more about our mortgage products, including private mortgage insurance, FHA loans, first-time homebuyer loans and more, contact one of our experienced mortgage representatives today.