All About Private Mortgage Insurance (PMI)

The home buying process involves a lot of moving parts, many of which are not only confusing to first-time homebuyers, but also costly. One of these costs that are often overlooked is private mortgage insurance, or PMI. PMI is often required by mortgage lenders if your down payment is less than 20% of the home's purchase price. 

What is PMI?

PMI protects your lender if you default on mortgage payments. It’s often required for conventional loans with down payments of less than 20% of a home’s purchasing price. This insurance type is generally included in a monthly mortgage payment, costing anywhere from 0.3% to 1.5% of the original loan amount. 

When Is PMI Required?

As stated, PMI is often required for conventional loans with “riskier” down payments. They may also be required for mortgage refinances if the equity of a home is less than 20%. PMI is required until your mortgage balance is 80% of the home’s original price or the borrower is halfway through their loan term. However, some private lending companies with higher interest rates don’t require PMI. Although this may result in higher mortgage payments each month, in some cases, you may actually save money. Like conventional loans, FHA loans require their own type of insurance called mortgage insurance premiums (MIPs). 

How Much Does PMI Cost?

Although the cost of PMI varies by the lender, it can be influenced by other factors. Credit score is one of the primary drivers of PMI cost. The lower your credit score is, the higher your PMI payments will be. Similarly, your down payment amount can also influence the cost of PMI. The less your down payment amount is, the higher the cost of PMI. The cost of PMI can also be driven by loan type. PMI payment options may depend on your lender, but they can be monthly, yearly, or a mix of both. 

Advantages to Paying PMI

One of the primary advantages of PMI is that it can help you qualify for a home and mortgage you wouldn’t otherwise qualify for. This is especially beneficial for people with lower credit scores. It may also help you secure a lower interest rate, and it’s often tax deductible. PMI is often bundled into your mortgage payment, saving you the time and stress of having to look for this type of insurance on your own. As stated, you’re not required to make PMI payments for the life of your mortgage, just until 80% of the home’s original price has been paid. 

Disadvantages

PMI is designed to protect the lender, not the borrower. That said, PMI does not reduce the risk of foreclosure if a borrower falls behind on mortgage payments. PMI also increases your monthly mortgage payments, leaving you with less disposable income. As PMI is required until you pay off 80% of the home’s original price, these payments can last for years. 

If you plan on paying for a home via a mortgage, it’s likely you’ll pay for private mortgage insurance as well. As stated, this insurance type is often required and bundled into your monthly mortgage payments. It’s not meant to protect you, though – it’s meant to protect your lender. 

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