What is Private Mortgage Insurance (PMI)?

Learn about PMI 

young couple looking over document in kitchen with laptop

If you take out a conventional mortgage loan with a downpayment of less than 20% of the home’s purchase price, you may be required to purchase private mortgage insurance (PMI). Private mortgage insurance is a type of coverage that protects the lender in the event that the borrower defaults on a loan. PMI differs from standard mortgage insurance premiums because it is organized by the lender through third party insurance companies. Besides the scenario above, you may also be required to purchase private mortgage insurance if:

  • Your loan to value ratio (LTV) is too high

  • You are refinancing your home with less than 20% equity

If any of the above applies to you, you should be prepared to factor PMI into your budget.

How Is Private Mortgage Insurance (PMI) Paid?

While there are several potential ways to pay for PMI, the most common is a monthly premium added directly to a borrower’s mortgage payment. However, PMI can also be paid in a one-time, upfront payment, or, as a combination of a one-time upfront payment with monthly premiums.

How Do I Compare PMI vs. Non-PMI Loans?

The specific interest rate you’ll get from a lender usually depends on factors including your credit score, your down payment amount, and overall market conditions. Therefore, it makes sense for borrowers to compare the savings they gain from avoiding a loan with PMI premiums with the costs of the potentially higher interest rates of a non-PMI loan.

In some cases, it may be more beneficial for a borrower to wait until they have enough money to afford a 20% down payment, as this will usually allow them to take out a loan without PMI, and may also allow them to get a loan with a lower interest rate.

PMI and FHA Mortgage Insurance Premiums: What’s The Difference?

Borrowers taking out a conventional mortgage with less than a 20% down payment will usually have to pay PMI, but what about those who take out a loan with the FHA (Federal Housing Administration)?

Instead of PMI, these borrowers will be required to pay FHA mortgage insurance premiums, often as a combination of a one-time, upfront payment, and a monthly premium. Since many FHA loans are issued with only a 10% down payment, FHA mortgage insurance is also designed to protect the lender should a borrower stop paying their mortgage.

Do Borrowers Refinancing Their Home Have to Pay PMI?

If you want to refinance your home with less than 20% equity, you may also have to pay PMI. Just like PMI for a conventional home loan, the insurance policy is designed to protect the lender in case you stop paying your mortgage and your home goes into foreclosure.

Can PMI Protect You If Your Home Goes Into Foreclosure?

No. Remember, PMI is designed to protect the lender, not you, so it won’t have any effect on you if stop paying your mortgage payments.

How Much Is PMI Per Month?

For most home loans, PMI premiums range from about 0.3% to 1.5% of the loan amount. Much like the original loan, PMI rates can vary based on factors including the borrower’s credit rate and the specific size of their down payment.

How Do You Get Rid of PMI?

If you have at least 20% equity in your home, you can ask your lender to cancel PMI. Lenders are required to cancel your PMI when you have 22% equity in your home, or when you’ve reached a 78% loan-to-value (LTV) ratio.

When Can You Drop PMI on an FHA Loan?

If you have a loan through the FHA (Federal Housing Administration), your FHA insurance cannot be canceled. However, you can refinance into a non-FHA-insured loan, which will eliminate your need for FHA insurance.  

In some scenarios, you can also refinance into another FHA-insurance loan in order to reduce your mortgage insurance premium, but if you stick with FHA loans, there is no way to completely eliminate it.

To learn more about the private mortgage insurance, fill out the form below to speak with a mortgage specialist.