What is private mortgage insurance?
Private mortgage insurance (PMI) is a type of mortgage insurance used with conventional loans. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan. PMI is arranged by the lender and provided by private insurance companies.
PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.
How do I pay for PMI?
There are several different ways to pay for PMI. Some lenders may offer more than one option, while other lenders do not. Ask questions when you meet with lenders to find out what your choices are.
The most common way to pay for PMI is a monthly premium.
- This premium is added to your monthly mortgage payment.
- The premium is shown on your Loan Estimate and Closing Disclosure on page 1, in the Projected Payments section.
Sometimes you pay for PMI with a one-time upfront premium paid at closing.
- This premium is shown on your Loan Estimate and Closing Disclosure on page 2, in section B.
- If you make an upfront payment and then move or refinance, you may not be entitled to a refund of the premium.
Sometimes you pay with both upfront and monthly premiums.
- The monthly premium is shown on your Loan Estimate and Closing Disclosure on page 1, in the Projected Payments section.
- The upfront premium is shown on your Loan Estimate and Closing Disclosure on page 2, in section B.
If the lenders you are working with offer more than one option, ask the loan officers to help you calculate the total costs over a few different timeframes that are realistic for you.
What factors should I consider when deciding whether to choose a loan that requires PMI?
Like other kinds of mortgage insurance, PMI can help you qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. And it doesn’t protect you if you run into problems on your mortgage.
Lenders may sometimes offer low-down payment conventional loans that do not require PMI. Usually, you will pay a higher interest rate for these loans. Paying a higher interest rate can be more or less expensive than PMI - it depends on your credit score, your down payment amount, the particular lender, and general market conditions. You may also want to ask a tax advisor about whether paying more in interest or paying PMI might affect your taxes differently.
Borrowers making a low down payment may also want to consider other types of loans, such as an FHA loan. Other types of loans may be more or less expensive than a conventional loan with PMI, depending on your credit score, your down payment amount, the particular lender, and general market conditions.
You may also want to consider saving up the money to make a 20 percent down payment. When you pay 20 percent down, PMI is not required with a conventional loan. You may also receive a lower interest rate with a 20 percent down payment.
Ask lenders to show you detailed pricing for different options so you can see which is the best deal.
TIP: You have a right to cancel your monthly mortgage insurance premium once you’ve accumulated a certain amount of equity. Learn more about your rights and ask lenders about their cancellation policies.
TIP: Private mortgage insurance protects the lender – not you. If you fall behind on your payments, you can lose your home through foreclosure.