If you’re wanting to purchase or refinance a home with a conventional loan, there are many factors to consider.
And if your down payment or home equity is less than 20 percent of the home’s value, it’s important to understand what private mortgage insurance is.
PMI might help you get a loan you wouldn’t normally qualify for, making your dreams of home ownership a reality sooner.
What Is PMI?
PMI is private mortgage insurance that is used with conventional loans. Insurance companies provide PMI, which is arranged by your lender to protect them if the borrower stops making payments.
But this only applies to mortgages where the down payment was less than 20 percent of a home’s purchase price. It’s also used when a lender refinances a mortgage where the borrower has less than 20 percent home equity.
Learning what you can about PMI prior to making an offer or arranging a refinance on your home can help you make the best mortgage decision for your family’s financial situation.
1. PMI Doesn’t Protect You, It Protects Your Lender
Though you pay for it and it increases the cost of your loan, PMI does not protect you — it actually protects the lender.
If you default on your mortgage payments, you could face foreclosure that could negatively impact your credit, whether you have PMI or not.
2. Different Types of Mortgage Insurance Programs Are Available
A variety of mortgage insurance programs help borrowers with low down payments or home equity to get home loans. Common mortgage insurance programs include:
-Private mortgage insurance for conventional loans arranged with a private mortgage insurance company. PMI rates are often lower than other mortgage insurance rates.
-Federal Housing Administration loans, which require FHA mortgage insurance, payable directly to the FHA. And premiums are the same for all borrowers regardless of your credit score. FHA mortgage insurance has both an upfront cost and a monthly cost.
-US Department of Agriculture mortgage insurance, which is similar to FHA loan insurance but cheaper
-Department of Veterans Affairs loan, which comes with a guarantee that replaces mortgage insurance on low down-payment mortgages. A VA loan guarantee works a lot like mortgage insurance does.
3. PMI Costs Vary by Credit Score and Down Payment Amount
By now you might wonder, just how much is PMI? It depends.
Borrowers should expect their PMI to cost between 0.3 percent and 1.15 percent of a home loan amount, according to Realtor.com.
The actual figure depends on your credit score and your total down payment amount.
In a recent Forbes article, Chris Hauber of Hallmark Home Mortgage in Denver, Colorado, said the PMI premium for a borrower with a 680 credit score could be double that of a borrower with a 740 credit score.
You can always estimate your PMI costs using an online PMI calculator, too, so you can get a better idea of how much you’ll pay.
4. PMI Premiums Could Be Due Upfront
PMI costs are known as premiums, and there are several ways to pay for premiums.
Monthly premiums are added to your monthly mortgage payment, but upfront premiums get paid at closing. However, if you move or refinance you might not receive a mortgage insurance premium refund.
Some lenders offer PMI with both a monthly and upfront premium component.
You might even have the opportunity to roll your PMI premium in with your mortgage. Some insurance companies give borrowers a choice as to how to pay, so ask your lender if this is an option.
5. PMI Is Not the Same as Mortgage Life Insurance
Do not confuse PMI with mortgage life insurance, which pays your mortgage off should you pass away. Remember, PMI protects the lender, whereas mortgage insurance — sometimes called mortgage protection insurance — pays off the balance owed on your mortgage or home loan in the event of your death.
6. How to Get Rid of PMI
If you meet certain conditions, it’s possible to cancel your PMI. Although lenders should automatically terminate the mortgage insurance when your loan balance reaches 78 percent of the original home value, this doesn’t always happen.
Once your loan balance has reached 80 percent of the original home value — and as long as your payments are up-to-date — you can send your lender a written request to cancel your PMI. Canceling your PMI will reduce your monthly costs.
Only you can decide whether the additional cost of PMI when you buy a home makes financial sense. However, doing your research and asking lenders questions about private mortgage insurance can help you make a more informed decision.