How Much Is PMI on a Mortgage?

What Is PMI?

While you're obligated to pay the monthly premium for PMI, this extra insurance does not benefit you. Rather, PMI protects mortgage lenders against default. Ideally, mortgage lenders prefer buyers to put down at least 20 percent for the home. But realistically, many buyers cannot afford this huge expense. PMI helps buyers without 20 percent down qualify to purchase homes.

The yearly premium for PMI is approximately one half of 1 percent of the loan balance. Therefore, if paying $200,000 for a home, you can expect PMI premiums around $2,000 a year. Payments are broken down into monthly payments and rolled into the mortgage loan. Using the previous example, monthly PMI premiums are $166 ($2,000 divided by 12 months).

Fortunately for home buyers, PMI isn't permanent. Lenders only require PMI when there's less than 20 percent equity in a home. As property values increase and buyers pay down the mortgage principal, they eventually build 20 percent equity. Lenders waive PMI at this time, thus reducing the mortgage payment.

Because PMI increases the house payments, consider techniques to help avoid this extra monthly insurance. Taking money from savings/retirement accounts or using proceeds from the sale of a prior residence can provide you with enough funds to put down 20 percent and avoid PMI. Another option involves negotiating a higher mortgage rate with your lender to avoid PMI. Because a higher rate can also increase your home loan payment, ask your lender for two loan quotes -- a quote with the higher mortgage rate and a quote that includes PMI payments -- to see which option is financially feasible.

Purchasing a home loan with two mortgages is another tactic to avoid PMI. You will basically take out a first mortgage for 80 percent of the loan balance and a second mortgage for 20 percent of the loan balance. Different piggybacking options are doable. For example, you could put down 10 percent on the house, take out a first mortgage for 80 percent and a second mortgage for the remaining 10 percent of the loan balance.