What is private mortgage insurance?
Private mortgage insurance (PMI) is a type of mortgage insurance you might be required to buy if you take out a conventional loan with a down payment of less than 20 percent of the purchase price. PMI protects the lender—not you—if you stop making payments on your loan.
The requirement to buy PMI usually also applies to refinancing a conventional loan, when your equity is less than 20 percent of the value of your home.
PMI is arranged by the lender and provided by private insurance companies. It insures the lender against loss caused by borrowers failing to make loan payments. Make no mistake: If you fall behind on your mortgage payments, PMI does not protect you and you can still lose your home through foreclosure.
PMI can help you qualify for a loan that you might not otherwise be able to get. But it can increase the cost of your loan.
How do I pay for PMI?
Before agreeing to a mortgage, ask lenders what PMI choices they offer.
The most common way to pay for PMI is a monthly premium.
- The premium is shown on your Loan Estimate and Closing Disclosure on page 1, in the Projected Payments section.
- The premium is added to your mortgage payment.
Sometimes you pay for PMI with a one-time up-front premium paid at closing.
- The premium is shown on your Loan Estimate and Closing Disclosure on page 2, in section B.
- If you make an up-front payment and then move or refinance, you might not be entitled to a refund of the premium.
Sometimes you pay with both up-front and monthly premiums.
- The up-front premium is shown on your Loan Estimate and Closing Disclosure on page 2, in section B.
- The monthly premium added to your monthly mortgage payment is shown on your Loan Estimate and Closing Disclosure on page 1, in the Projected Payments section.
Lenders might offer you more than one option. Ask the loan officer to help you calculate the total costs over a few different timeframes that are realistic for you.
How does PMI compare to other parts of my loan offer?
Ask lenders to show you detailed pricing for different options so you can compare and decide which option is the best deal for you.
Lenders sometimes offer conventional loans with smaller down payments that do not require PMI. As a tradeoff, you usually pay a higher interest rate for these loans. Paying a higher interest rate can be more or less expensive than the PMI, depending on a number of factors, including how long you plan to stay in the home.
You might want to ask a tax advisor whether paying more in interest or paying PMI might affect your taxes differently.
Other loan programs
Borrowers making a low down payment might 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 lender, and general market conditions.
You might 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 could also receive a lower interest rate with a 20 percent down payment.