What is PMI?

 

For many people, especially first-time homebuyers, it can be quite challenging to come up with a 20 percent down payment to purchase a home. Luckily, when it comes to Conventional loans, there is a solution: private mortgage insurance, or PMI.

When putting down less than 20 percent of the appraised home value or sale price, a homebuyer is typically required to carry PMI. Should a homebuyer default on their loan, the lender will still receive payments for the home.

And, although PMI does protect the lender, it also benefits the homebuyer by allowing them to purchase a home without having to save up a significant amount of money to put towards the down payment. For many buyers who want to get into a new home quickly, being required to have PMI is worth it.

How much does PMI cost?

The cost of PMI varies depending on the lender, but is usually established by the insurance company, and based on the following criteria:

• Loan amount
• Terms of loan
• Loan-to-value ratio
• Type of loan
• Credit score

Credit scores affect PMI premiums significantly, which when paid in monthly installments can range from 0.2% to over 1% of the loan amount. For example, if the PMI factor is found to be .5% for a particular loan based on the criteria above, you would simply multiply that factor times the loan amount and divide by 12 to get the monthly PMI payment. For a $165,000 loan, it would be 165,000 x .005 / 12 = $68.75 per month.

How is PMI paid?

There are several ways to pay for PMI including in a single premium plan, monthly, or annually, so it is important to ask your lender which options they offer to select one that works best for you.

How long are you required to have PMI?

After you have paid off 22 percent of your home, your PMI will fall off, but you can opt-out once you have paid off at least 20 percent, if you can demonstrate through an updated appraisal that the value is sufficient to warrant the PMI removal. By law, a lender must cancel your PMI once you have paid down 78 percent of the home's original amount.

Do other loan types have PMI?

While PMI is a term that is related to Conventional loans, other types of lending have their own version of protections for the lender, which benefits the customer with a lower down payment requirement.  For FHA loans, it is called the Mortgage Insurance Premium (or MIP) and allows you to get a loan with as little as 3.5% down.  VA loans have a Funding Fee and USDA loans have a Guaranty Fee.  These fees allow each program to provide a 0% down payment option to borrowers.

Want to know if you qualify?

If you are looking to purchase a new home, let our team of experts help get you the financing you need. For over 20 years, we have assisted thousands of customers with their home buying process. We are committed to finding the right mortgage product to suit your needs and to help make your experience as pleasant as possible. For more information or to request a free consultation, please call Butler Mortgage at 407-931-3800.