The Ins and Outs of PMI

What is PMI?

If you’re walking down the street and someone stops and asks you what PMI stands for, would you know the answer? If you reply “private mortgage insurance”, then you deserve a prize!

PMI, or private mortgage insurance, is a type of insurance used with conventional mortgage loans. It’s designed to protect the lender if you stop making payments on your loan.

Lenders typically require that a borrower seeking a home loan provide a 20 percent down payment of the home’s purchase price. If the borrower doesn’t have the funds to cover the 20 percent down payment, lenders will likely look at the loan as a riskier investment and will require a PMI payment from the borrower, thereby protecting them should the borrower stop making payments on the loan.

PMI is also typically required if you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home.

So how is PMI paid for?

That depends on the lender. Some may offer several options for payment, while others may not.

The most common payment approach is a premium that is added to your monthly mortgage payment. This premium usually is shown on your loan estimate and closing disclosure in the Projected Payments section.

Some lenders offer another option, where the borrower can pay a one-time premium upfront at the time of closing.

Check with your lender to see what options they have available.

Is PMI right for me?

While PMI can help you qualify for a loan that you might not otherwise be able to get (if for example you don’t have a full 20 percent down payment), keep in mind that it does increase the cost of your loan. And it won’t protect you if you run into problems making loan payments. Use our handy calculator to help estimate how much your monthly PMI payment might be given your down payment, loan term, and loan amount.

As an alternative to PMI, some lenders offer low down payment conventional loans that don’t require PMI, but these types of loans usually come with a higher interest rate.

The good news regarding PMI is that it doesn’t last the entire life of the loan. It can be removed if the borrower is up-to-date on monthly payments and the principal balance of the mortgage falls to 80 percent of the original value of the home. Once these conditions are met, the borrower should contact the lender to request PMI cancellation, or see if there are any other requirements to qualify for cancellation.

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