What Is PMI?
Do you need private mortgage insurance?
Let’s say you need to borrow money to buy a house like most people do. Before the bank approves your home loan, it wants to know what kind of risk you pose. For example, if you lose your job, do you have savings or other resources to cover the mortgage, or are you likely to default on the monthly payments? Private mortgage insurance puts a lender at ease.
You pay for this insurance, which protects the bank if—for whatever reason—you stop making mortgage payments. Some home loans require mortgage insurance, but the better your credit, the lower your payments will be.
Want to know more about private mortgage insurance? You’ll find answers to frequently asked questions below.
What is PMI?
If you buy a home with a conventional loan, private mortgage insurance—or PMI—protects your lender if you stop making payments on that loan. PMI insurance essentially eliminates the risk of loan default and foreclosure for the lender. PMI is usually a portion of your monthly mortgage payment. Your mortgage lender determines the amount of coverage needed, then buys that coverage with the dollars that you’ve paid, as a part of your mortgage payment. The money you pay as private mortgage insurance does not build equity in your home.
Do I need PMI?
If you put less than 20 percent (of the purchase price) down on your home, your lender can require you to carry PMI. Similarly, if you buy a home with a Federal Housing Administration (FHA) loan, you are required to carry mortgage insurance. You pay your mortgage insurance premium—or MIP—to the U.S. government for the life of the loan if you put down less than 10 percent. If you have an FHA loan and make a down payment of more than 10 percent, you can have the MIP insurance removed after making payments for 11 years.
How does private mortgage insurance work?
Private mortgage insurance protects your lender—not you. So your mortgage lender will decide how much coverage it needs, and will arrange for coverage through a private insurance company. A homebuyer typically makes a single monthly payment to their lender, which includes both their mortgage payment and their PMI payment.
How much does private mortgage insurance cost?
PMI premiums usually range from 0.4 to 2.25 percent of your loan balance each year, most often between 0.5 and 1 percent. Your rate will depend on factors such as your credit history and debt-to-income ratio.
Your PMI payments decrease over time as you pay down your loan and build equity. In fact, the federal Homeowner’s Protection Act mandates that, once your home equity hits 78 percent of the purchase price, your lender can no longer require you to carry PMI.
How do I pay private mortgage insurance?
Mortgage insurance is typically paid as a fee that’s rolled into your monthly mortgage payment, itemized on your monthly statement. However, if you’d like to lower your monthly mortgage payment, you can choose to pay your entire PMI amount upfront—rather than financing it over time as part of your mortgage payment—called single-payment PMI. A one-time PMI payment usually equates to 1 to 2 percent of the loan amount. So if you took out a $350,000 loan, your lump-sum PMI payment would likely be between $3,500 and $7,000.
Is PMI required?
You are required to carry private mortgage insurance if your down payment is less than 20 percent of the home’s total purchase price, or if you have an FHA home loan.
How do I avoid needing private mortgage insurance?
Make at least a 20 percent down payment on your home.
If you have an FHA loan, you won’t be able to avoid getting FHA insurance. The only way to drop mortgage insurance payments is to refinance—and replace your FHA loan with a non-FHA one—or make a down payment of more than 10 percent of the total cost of the home, which allows you to have the MIP insurance removed after making payments for 11 years.