The home buying experience can be an overwhelming experience that can be exhilarating, fun, stressful and exhausting. The process of securing a mortgage, successfully bidding on a home and completing the transaction can be lengthy, complex and involve seemingly endless professionals. Those professionals may include a buyer’s agent, a loan officer, a home inspector, title […]
What is private mortgage insurance?
Private mortgage insurance (PMI) is usually required for conventional loans when you put down less than 20% of the home’s purchase price. This is designed to protect the lender if you stop making payments.
PMI is not mortgage protection insurance (MPI), a type of life or disability insurance that helps your family members pay off your mortgage should something happen to you.
Here’s what you need to know:
Not all mortgages require PMI
Know that there are different types of loans that do not require PMI if you put down less than 20%. For example, an FHA mortgage loan doesn’t require PMI but does require an upfront mortgage insurance premium and mortgage insurance premium.
How much is PMI
PMI is based on insurance rates and typically costs 0.5-2% of your loan amount per year and is based on the loan attributes such as down payment, credit score and debt-to-income ratios. When you pay for PMI, you have several choices to choose from. The most popular option is a monthly premium paid with your mortgage payments. Other options are an up-front premium paid at closing or a combination of monthly and up-front. There is also the option of PMI being borrower- or lender-paid:
- Borrower-paid PMI: The most common type of PMI where the premium is added to your monthly mortgage payment.
- Lender-paid PMI: Your lender will pay the PMI upfront as a lump sum when you close, and you pay that back by accepting a higher interest rate.
Your lender will talk with you about these options, and together you’ll decide which is the best for you. Remember that lender-paid PMI cannot be canceled since it was paid upfront. Ask your loan officer to help you calculate total costs and which would be the best option for you.
Increasing the down payment may reduce the amount of PMI you must pay. This is because a smaller down payment can represent a higher risk for the lender who will stand to lose more if you default.
Removing PMI from your mortgage
The federal Homeowners Protection Act gives you the right to remove PMI from your mortgage once you’ve built up enough equity. When it comes down to removing PMI from your mortgage, you have several options:
- Keep making payments until it’s canceled
- When you reach 20% equity, request cancellation
- Get your home re-appraised
- Refinance your mortgage
To remove PMI from your mortgage, talk to your lender about your options.
PMI rates and duration will depend on your particular loan and financial situation. During the homebuying process, ask your lender how PMI – or another type of mortgage insurance – works and how much you might have to pay.