Private mortgage insurance, or PMI, is insurance that protects a lender if you fall behind on your mortgage payments. PMI is required on conventional loans (those backed by Federal government-sponsored enterprises Freddie Mac and Fannie Mae) with a down payment or equity of less than 20% of a home’s purchase price or home’s value on a refinance.
How Do I Pay for It?
Most commonly, private mortgage insurance is paid monthly as a part of your total monthly mortgage payment. This is referred to as borrower-paid monthly mortgage insurance. There are also a few additional options:
- Borrower-Paid Single Premium:Â Upfront amount paid by the borrower at the time of closing instead of the borrower paying monthly PMI premiums.
- Lender-Paid Single Premium: Upfront amount paid by the lender after closing instead of the borrower paying monthly PMI premiums. This option typically results in a higher interest rate to the borrower, but could still lower the overall monthly payment.
- Split Premium: A combination, or split, of both borrower-paid monthly and borrower-paid single premiums. Each of the monthly and single premium portions of split premium mortgage insurance are lower than they otherwise would be on their own.
Work with an expert mortgage advisor to help you determine which of the private mortgage insurance options are best for you.
How Much Does It Cost?
Independent companies provide lenders with private mortgage insurance. These companies are called private mortgage insurance, of which there are only a handful approved by Freddie Mac and Fannie Mae. These PMI companies determine the cost of PMI based on several factors, including:
- Credit Score
- Loan Term
- Down Payment or Equity Percentage
- Debt-to-Income (DTI) Ratio
- Property Type
How Long Does PMI Last?
If you do nothing, monthly PMI will automatically terminate when you hit 22% equity from your original loan amount. This is a requirement of the Homeowners Protection Act of 1998, but only applies to a single-family dwelling that is your primary residence, while multi-unit dwellings and other occupancy types (such as a vacation home) are excluded from this requirement of this regulation.
However, you may be able to terminate PMI due to appreciation in your home. Therefore, if you feel that you have 20% equity in the home, you can call you lender and set up an appraisal. Of course, you are paying for the appraisal, but if you do indeed have 20% equity in the home you can turn off the PMI. Just remember, you must have PMI for a minimum of two (2) years. So even if you pay down your loan right away or have enough equity in the property, you will still pay the PMI for two (2) years before it can be turned off.
Does PMI Cover Me if I Were to Get Insured?
No, PMI only protects the lender in the case of a borrower defaulting on a mortgage. Mortgage disability insurance or mortgage protection insurance offered separately by independent insurers is a different type of insurance that covers your monthly mortgage payments for a specified period of time should you become disabled.
Why Am I Required to Pay for This Insurance?
Sorry, private mortgage insurance is a requirement on conventional loans with less than 20% down payment or equity.
