If you don’t have a 20% down payment on the home you’re interested in, lenders will generally require that you to pay PMI. This insurance helps protect the lender in the event that your home goes into foreclosure and its value declines to the point that the sale won’t cover the original mortgage.
Since having a larger down payment helps prevent this scenario, you don’t need to pay private mortgage insurance if your mortgage is less than or equal to 80% of your home’s value. Private mortgage insurance hardly benefits you, the borrower, except it can allow you to get into “more” house with less down payment. Otherwise, it’s simply an extra charge that will be tacked onto your monthly mortgage payment.
The amount you’ll have to pay for private mortgage insurance varies depending on how large your loan is, how good your credit is, and how large your down payment is. But a reasonable estimate is that it will cost about 0.5% of your original loan value each year. On a $200,000 loan, that equals $1,000 per year, or $83 per month.
On most loans, PMI can be removed once your home’s loan to value ratio drops below 80%. It’s even tax-deductible for some people. However, avoiding this extra expense will save you money, especially if your income tax bracket is too high to qualify for the PMI tax deduction.