What is Private Mortgage Insurance?

Private mortgage insurance (PMI), mortgage insurance (MI), private MI—these are all different names for one insurance product, which I’ll refer to as PMI for the purposes of this article. PMI is required when you take out a home loan with a down payment that is less than 20% of the purchase price or appraisal value, whichever is lower.

This insurance is not life insurance or home/hazard insurance; it is mortgage insurance. It is a guaranty that protects your mortgage lender, reducing their loss if you are not able to repay the mortgage.

As you might imagine, PMI adds to the cost of the mortgage. However, there are benefits to PMI that make it worthwhile for some home buyers.

WHAT ARE THE BENEFITS OF MORTGAGE INSURANCE?

One of the main benefits of mortgage insurance is that it allows you to buy a home sooner because you don’t have to save for the 20% down payment. If you don’t have a lot of money upfront, foregoing the down payment may allow you to buy furniture for the new house or make necessary renovations. If your cash flow is not optimal, you may simply want to keep money on reserve in case of emergency.

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HOW MUCH DOES PMI COST, AND HOW DO I PAY FOR IT?

The cost of PMI is determined by several factors, including your credit score, down payment amount, and loan-to-value ratio (your mortgage amount divided by the appraised property value). Your PMI may also be affected by whether you select a fixed-rate or an adjustable-rate loan or whether you are using the loan to purchase a home or refinance it.

Most PMI is paid monthly, but some programs may allow for a single premium, which can be paid in full at closing or may be financed into the loan amount. Another way to pay is by split premiums, which allow you to pay part of the PMI premium upfront in order to reduce the monthly premium, which you will pay with your mortgage payment.

HOW LONG DO I HAVE TO PAY FOR PMI?

Your financial institution is required to cancel your PMI once you have paid off 78% of the original value and are current on the payments required by the terms of the mortgage. The original value is the lesser of the sales price or appraised value at the time you received the loan. If you want to cancel earlier, you can request that your PMI be canceled once you have paid your balance down to 80% of the original value. Some institutions will require that you have the loan for a specific period (like two years) and that you have established an acceptable payment schedule.

Some loans may require that you maintain PMI coverage for the life of the loan. Loans that fall in this category include Federal Housing Administration (FHA), Veterans Affairs (VA), or United States Department of Agriculture (USDA) loans.

IS PMI RIGHT FOR ME?

I’m hoping that this article has helped you determine whether PMI is the right choice for you. If you’re still uncertain, speak to your mortgage lender. They can help you do the math and consider all your options for financing.

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About Tammy Farnham

With over 26 years of credit union experience, Tammy Farnham is a mortgage originator who serves the mortgage needs of Vermont families in Northeastern and Central Vermont, including Essex, Caledonia, Orange, Orleans and Washington Counties. Tammy enjoys helping Vermonters with their financial needs and assisting borrowers with their mortgage needs. Tammy grew up in Plainfield, where she currently lives with her husband and two grown children. She spends her free time helping with her family business, Farnham Farm Maple Sugaring. She likes to do crafts and gardening and spend time with family, friends, and her dog Callie.

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