What Is Private Mortgage Insurance?

In considering the total costs of buying and owning a home, don't forget to factor in private mortgage insurance (PMI). Depending on your loan type and how much you’re able to bring to the table as a down payment, you may be required to pay an additional monthly insurance premium for PMI.

What is a private mortgage insurance? Will I need to pay it?

PMI is an added insurance policy for homeowners who:

• Have a conventional mortgage.
• Make a down payment of less than 20% of the home sale price.

PMI is not  the same thing as homeowner's insurance. PMI is an extra insurance policy for homeowners that protects your lender if you are unable to pay your mortgage.

Some lenders offer loan products that do not require you to have PMI. However, in return, these lenders will often charge higher interest rates. Depending on how long you plan to stay in the home or keep the same mortgage, a higher interest rate can be more or less expensive than paying PMI.

How much does PMI cost?

The cost of PMI varies based on your loan-to-value ratio — the amount you owe on your mortgage compared to your home’s value — and your credit score.

You can expect to pay between $30 and $70 per month for every $100,000 you borrowed.
 

How do I pay PMI?

PMI payments are included as part of your monthly mortgage payment. Similar to homeowner’s insurance and tax payments, you pay your PMI premium into your escrow account and your lender issues it for you.  

Will I pay PMI for the length of my loan?

 Some types of loans, such as FHA loans, do require you to pay PMI for the life of the loan.

However, for many other types of loans, once you've built 20% equity in your home, you can ask your lender to cancel your PMI and remove that expense from your monthly payment. (To estimate your equity, subtract your mortgage balance from the appraised market value of your home.)

If you're current on your mortgage payments, PMI will automatically terminate on the date when your loan balance is scheduled to reach 78% of the original value of your home. That date will be given to you in writing on a PMI disclosure form when you get your mortgage.

It’s important to ask your lender about PMI when you’re considering loan options and costs. 

How PMI fits into the bigger picture

The more you put down as a down payment, the lower your monthly mortgage payment and the less you'll owe your lender. You’ll also put yourself closer to reaching 20% equity and canceling those extra PMI payments.

Although PMI is an added cost, it may enable you to buy a home sooner and begin building equity, instead of waiting until you’ve built enough savings to comfortably make a 20% down payment, while leaving additional savings as a financial cushion.

There are a multitude of low down payment mortgage programs available — and not only for first-time homebuyers. Options such as Freddie Mac’s Home Possible^®mortgages allow qualified homebuyers to put down as little as 3% and have reduced PMI requirements for those with less than 10% equity in their homes.

Carefully evaluate your finances and talk with your lender or a trusted housing professional to determine the best mortgage option for you.