Private mortgage insurance, or PMI, is a type of insurance that helps protect lenders in the event that a borrower defaults on their mortgage. It’s important to note that PMI isn’t required for all mortgages, but it is typically required when a borrower puts down less than 20% of the home’s purchase price. In this blog post, we will discuss what Private mortgage insurance is, how much it costs, and the different types.
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance, or PMI, is insurance that lenders require borrowers to have when they get a mortgage and do not have a down payment of at least 20% of the home’s value. Lenders will typically collect PMI from the borrower as part of the monthly mortgage payment.
PMI protects the lender if the borrower defaults on their loan. If the borrower stops making payments and the home goes into foreclosure, the lender will recoup some of their losses by selling the home.
Borrowers who have private mortgage insurance must pay for it until they have built up enough equity in their home (usually when they have paid off at least 20% of the loan). At that point, they can request that the lender cancel PMI.
Some lenders offer “lender-paid” private mortgage insurance, which means that the cost of PMI is built into the interest rate of the loan. This can make it more expensive over time, so it’s important to compare options carefully before deciding on a loan.
How Much Does PMI Cost?
While private mortgage insurance can be expensive, it can also help homebuyers to become homeowners sooner than they would otherwise be able to. PMI costs can range from 0.5% to 2% of the loan amount annually, and they are typically paid monthly along with the mortgage payment. For example, if a borrower has a monthly mortgage payment of $1,000 and PMI costs of $100 per month, their total monthly mortgage payment would be $1,100. Private mortgage insurance typically lasts for 5 years or until the borrower has built up 20% equity in their home, with the current state of the market it is possible to do this sooner.
The Different Types of PMI
There are different types of PMI, including borrower-paid mortgage insurance, lender-paid mortgage insurance, single-premium mortgage insurance, split-premium mortgage insurance, and FHA mortgage insurance. each type of PMI has its benefits and drawbacks, so it’s important to understand all of your options before deciding which one is right for you.
- Borrower-paid mortgage insurance is the most common type of PMI. This type of insurance is paid by the borrower as part of their monthly mortgage payment. The benefit of this type of PMI is that it protects the lender in the event of a default. However, the downside is that it adds to the borrower’s monthly payment.
- Lender-paid mortgage insurance is another type of PMI that is paid by the lender, rather than the borrower. The advantage of this type of PMI is that it does not increase the borrower’s monthly payments. However, it does not provide as much protection for the lender in the event of a default.
- Split-premium mortgage insurance is another type of PMI that allows borrowers to pay a lower premium up front and a higher premium later on. This can be beneficial for borrowers who want to avoid having to pay PMI every month, but it is important to note that this type of PMI does not protect the lender in the event of a default.
- FHA mortgage insurance is a type of PMI that is required for all FHA loans. The benefit of this type of PMI is that it protects the lender in the event of a default. However, the downside is that it adds to the borrower’s monthly payment.
Private mortgage insurance can be a costly but necessary part of getting a home loan when you cannot put at least 20% down. There are different types of PMI, and each has its pros and cons. It’s important to understand all of your options before deciding which type of PMI is right for you.
