A Quick Guide to Private Mortgage Insurance

05 Nov 2017

Upon receiving your loan estimate, you may come across something called Private Mortgage Insurance, or PMI. This is a type of mortgage insurance found in conventional home loans – e.g., those not backed by a government agency – that protects the lender in the event that you are unable to make your payments. Though it exists to benefit the lender, PMI reduces their risk enough to make them more willing to issue a loan they may not otherwise qualify you for – but is it worth the extra expense? Here’s a quick and crucial rundown of Private Mortgage Insurance and what it means for you.

Why and When is Private Mortgage Insurance Required?

PMI is set by the lender and provided by a private insurance company for conventional loans in which the borrower’s down payment is less than 20 percent of the sale’s price. It is also usually required for conventional loans being utilized to refinance a home in which your equity is less than 20 percent of the value.

The idea behind PMI is that if you can’t put more than 20 percent down, there is a greater likelihood you may fall behind on your payments, thus making you risky to lend to. Hence PMI protects the lender sufficiently and makes them more willing to approve you for a loan.

Of course, this means you’ll essentially be paying extra for your mortgage, either through a monthly premium or a one-time upfront premium at closing (sometimes both). Depending on the lender, you may have different payment options to choose from.

Note that FHA loans, which are among the most common home loans, also require mortgage insurance, though strictly speaking this isn’t private mortgage insurance.

 How is the Cost of Private Mortgage Insurance Calculated?

PMI is usually 0.5 to 1 percent of the total loan amount, though it may be more. So if you get a $100,000 loan with a PMI fee of 1 percent, you’re looking at additional charges of $83.33 monthly, or up to $1,000 annually. PMI must usually be paid until the total equity of the property reaches 20 percent, by which point you may have already paid thousands for PMI alone. However, some lenders will require PMI to be paid for a certain time period regardless of this equity threshold.

Should I Choose a Loan With a PMI Requirement?

It depends: PMI can help you get a loan you might not otherwise have been approved for, but at the same time it does increase the overall cost of the loan. Alternatively, some lenders will offer loans with low down payments that don’t require PMI, but these will often require higher interest payments. Depending on your credit score, down payment amount, and other factors, it may be cheaper to pay PMI than a higher interest rate.

You can also try saving up more money to afford the minimum 20 percent down payment needed to avoid PMI, or look to other types of home loans, such as an FHA loans, that may accommodate lower down payments without the extra expense. All of this will depend on your credit and financial history and market conditions at the time.

With the help and guidance of a professional mortgage broker like Legacy Park Mortgage, you can find a variety of affordable home loans based on your unique needs and background. We’ll work closely with you to find a mortgage that’s right for you, with no hidden or unexplained costs and charges. To get started, contact (305) 901-1791 or email info@legacyparkmortgage.com