When considering buying a home and what your mortgage payment will look like, it’s important to be familiar with private mortgage insurance (PMI). All parties in the mortgage and homebuying process must be protected from certain risks, and this includes not only buyers and sellers, but also mortgage lenders. That’s where PMI comes in.
What exactly is private mortgage insurance, when is it required, what types are there, and when can it be removed? Here’s a breakdown of PMI and how it may impact your mortgage.
Private Mortgage Insurance Basics
PMI is an insurance that homebuyers are typically required to have when they pay less than 20 percent down payment for a home with a Conventional loan. The purpose of PMI is to protect the lender in case the borrower defaults on the loan and fails to make payments. This mitigates risk for the loan provider. If a property goes into foreclosure, PMI can reimburse the lender for a portion of their losses.
The cost for PMI is typically rolled into the monthly mortgage payment and funneled to the insurance provider—in the event the lender needs to make a claim.
It’s important to note that PMI is not homeowners insurance, which protects against things like fire damage or theft. PMI is required by lenders, and it only covers the lender in case of default. It’s not used to protect homebuyers’ interests. However, having PMI may allow borrowers to buy a home sooner than later, without having to save up for a larger down payment.
Types of PMI
While private mortgage insurance plans have the same goals, there are a few different ways to structure the PMI payments applied to a mortgage depending on specific circumstances or preferences. These options include:
- Buyer-Paid PMI: By far the most common type of PMI, buyer-paid private mortgage insurance involves the homebuyer or borrower paying a monthly insurance premium, which is added on to the monthly loan payment and paid to the insurance provider, though the charge can sometimes be rolled into the mortgage itself if applicable.
- Lender-Paid PMI: A much less common option is when the lender pays the monthly premiums, however as a result, the borrower would pay a higher interest rate to make up for the lender’s investment.
- Single-Premium PMI: This type of private mortgage insurance consists of the borrower paying for the full PMI policy upfront in a single lump sum, often at closing. Once this is paid, it eliminates monthly PMI payments.
- Split-Premium PMI: Borrowers may also have the option to combine the PMI payment options listed above by paying an upfront lump sum at closing that doesn’t cover the entire insurance policy, so a lower monthly premium is still required in addition to the mortgage payment.
Benefits of PMI
When lenders have the appropriate protections in place to provide loans, like requiring PMI in certain cases, they can offer mortgages to more families and individuals than if they were faced with taking on more risk.
Similar to how car insurance can protect both the owner of the car and the lender in case of an accident, private mortgage insurance is just another way to ensure that things go smoothly for all parties involved in a home loan. It gives more people the opportunity to buy homes with lower down payment options, while also making sure that lenders have protection against borrowers defaulting on their loans.
When PMI Is Required and How to Get Rid of It?
As noted above, the most common PMI requirement is when a homebuyer puts down less than 20 percent for a Conventional loan. However, this isn’t a set-in-stone rule. There can be loan programs with lower down payment requirements that may not require PMI. Always discuss with your loan officer to go over your qualified options.
Additionally, in most cases, PMI can be removed at some point during the life of the loan. Generally, once the borrower reaches 22 percent equity built in the home through things like paying down the mortgage or appreciation of the home’s value, PMI can be removed. This is done by request so if you think you may have reached this point, it’s important to contact your lender and ask about removal of the insurance. In other situations, PMI may automatically be removed once the homeowner reaches a certain agreed upon equity threshold.
For more on private mortgage insurance or to learn about other home loan programs, contact the team at Supreme Lending today.