Most conventional mortgages require that you pay private mortgage insurance (PMI) if you don’t put at least 20% down when you purchase your home. For example, you’d have to pay PMI if you buy a $400,000 home and borrow more than $320,000. PMI protects your lender from loss in case of foreclosure.
Although you pay for PMI, it benefits only the lender. If you can’t pay your mortgage, PMI doesn’t help you. Avoiding PMI is usually a good idea if you can. But if you do need PMI — don’t stress. It’s not always easy to come up with a 20% down payment.
Private mortgage insurance is usually priced between 0.5% and 1% of the amount you borrow. This amount is added onto your mortgage payments, and you’ll have to pay it until your lender automatically removes it. Usually, this happens once your home loan balance hits 78% of your home’s original value. If your lender doesn’t automatically remove it, you may need request to stop paying. You can usually ask for this after your balance hits 80% of your home’s current appraised value.
There are some lenders who offer special mortgages without PMI insurance. PMI could potentially also be avoided if you take out one home loan for 80% of the home’s value and then get a second loan to cover the 20% down payment (this is called an 80-20 loan)
Mortgage insurance isn’t unique to conventional loans: It’s required on some government-backed loans for less-qualified lenders as well. For example, the VA doesn’t require mortgage insurance, but the FHA does. And unlike conventional loans, which usually only charge annual premiums paid monthly, on FHA loans you have to pay both an up-front and annual mortgage premium. FHA mortgage insurance may also be required for a longer period of time — sometimes for the life of the loan, depending on the amount of your down payment.
View more information: https://www.fool.com/the-ascent/mortgages/what-conventional-loan/