Private Mortgage Insurance Explained Simply
Scott P. Rogers
If you are buying a home with less than 20 percent down, you will likely run into something called private mortgage insurance, or PMI.
PMI is insurance that protects the lender, not the buyer. When a smaller down payment is used, the lender takes on more risk, and PMI helps cover that risk.
When PMI is required
PMI is usually required on conventional loans when the down payment is less than 20 percent. The smaller the down payment, the more likely PMI will be part of the loan.
How PMI is paid
There are a few common ways PMI shows up.
1. Most often, PMI is added to the monthly mortgage payment.
2. In some cases, it can be paid upfront at closing.
3. Sometimes the lender pays it, but the cost is built into a slightly higher interest rate.
You are paying for PMI in any of these scenarios, but how it appears can look different from loan to loan.
When PMI can go away
On most conventional loans, PMI can be removed once you reach about 20 percent equity in the home and is automatically removed around 22 percent.
Equity can come from paying the loan down over time or from the home increasing in value.
Not all mortgage insurance works this way. For example, FHA loans usually require mortgage insurance for the life of the loan unless it is refinanced.
Is PMI a bad thing
PMI is not ideal (since it increases your monthly housing cost) but it often makes homeownership possible sooner. Many buyers use PMI as a temporary cost while building equity.
The important part is knowing how much PMI will cost you and when it can be removed.
The bottom line
PMI is common, manageable, and usually temporary.
If you are putting less than 20 percent down, make sure you understand how PMI is being paid and when it can be removed.
PMI is insurance that protects the lender, not the buyer. When a smaller down payment is used, the lender takes on more risk, and PMI helps cover that risk.
When PMI is required
PMI is usually required on conventional loans when the down payment is less than 20 percent. The smaller the down payment, the more likely PMI will be part of the loan.
How PMI is paid
There are a few common ways PMI shows up.
1. Most often, PMI is added to the monthly mortgage payment.
2. In some cases, it can be paid upfront at closing.
3. Sometimes the lender pays it, but the cost is built into a slightly higher interest rate.
You are paying for PMI in any of these scenarios, but how it appears can look different from loan to loan.
When PMI can go away
On most conventional loans, PMI can be removed once you reach about 20 percent equity in the home and is automatically removed around 22 percent.
Equity can come from paying the loan down over time or from the home increasing in value.
Not all mortgage insurance works this way. For example, FHA loans usually require mortgage insurance for the life of the loan unless it is refinanced.
Is PMI a bad thing
PMI is not ideal (since it increases your monthly housing cost) but it often makes homeownership possible sooner. Many buyers use PMI as a temporary cost while building equity.
The important part is knowing how much PMI will cost you and when it can be removed.
The bottom line
PMI is common, manageable, and usually temporary.
If you are putting less than 20 percent down, make sure you understand how PMI is being paid and when it can be removed.
