What is Private Mortgage Insurance?

What is Private Mortgage Insurance?

What is Private Mortgage Insurance?

Private mortgage insurance or PMI is an insurance policy provided by private insurance firms that protect the mortgage lender if a borrower can no longer afford to pay their mortgage. Private mortgage insurance is necessary when homeowners have a down payment less than 20% or home equity less than 20%. PMI helps borrowers with smaller down payments qualify for a home. Private mortgage insurance is an additional monthly cost in addition to your mortgage payment.

Private mortgage insurances can range from 0.25% to 2% of your mortgage balance per year. Your monthly PMI depends on your amount of down payment, mortgage amount, mortgage term, and credit score. Once your home has achieved 20% equity, homeowners can cancel their mortgage insurances.

What are different types of Private Mortgage Insurance?

  1. Borrower-Paid Private Mortgage Insurance
    • Pay monthly premium every month until your mortgage insurances is terminated
    • PMI terminated when you reach 20% home equity
    • Can terminate when you reach the midpoint of the amortization period
  2. Single Premium Private Mortgage Insurance
    • Premium upfront in a single lump sum (no monthly payments)
    • Saves money for long-term homeowners that keeps their home or loan for 3 years
  3. Lender-Paid Private Mortgage Insurance
    • Lender pays the mortgage insurances monthly
    • Only mortgage payment no PMI included
    • Cannot cancel PMI because it is a permanent part of the loan
    • Can have a higher interest rate

Avoiding Private Mortgage Insurance

Private mortgage insurance is expensive; therefore, avoiding it will help lower your monthly cost. Another option would be to take a first mortgage at 80%, then a second mortgage covering 5%, with a down payment of 15%. However, the second mortgage can have a higher interest rate than the first mortgage.

How can homeowners terminate their Private Mortgage Insurance?

When your home equity meets 78% threshold the private mortgage insurance automatically terminates. However, if you make additional payments and reach the 78% threshold the insurance will not terminate until your scheduled date. Therefore, borrowers should keep track of their home equity or call their lender to verify the equity amount.