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.