What is private mortgage insurance (PMI)?
Private mortgage insurance (PMI) is insurance that offers coverage to your mortgage lender should you default on your mortgage payments. It’s often used in order to provide mortgages to home buyers bringing a lower down payment and don’t have enough cash on hand for a 20% down payment. PMI helps lenders reduce the risk of lending money to someone who may not be able to make their mortgage payments.
If you purchase a home and pay private mortgage insurance, you’ll often see it automatically added to your monthly mortgage payment. Much like home insurance or taxes, the money usually goes to your escrow account and your lender pays the PMI premiums from the account.
However, PMI is not a set, universal rate. Like any other form of insurance, the rates providers offer are extremely variable. It is important to work with a mortgage lender that actively seeks the best PMI rate available for your situation.
Private Mortgage Insurance (PMI) FAQs
When is PMI required?
Almost all types of home loans require some amount of down payment. The industry standard is to require a home buyer to put down 20% of their home’s purchase price, so the loan is not more than 80% of the home’s value. If you’re purchasing a home and don’t have the cash available to pay at least 20% down, your lender is likely to add private mortgage insurance which will add to your monthly mortgage payment.
Why do lenders require PMI?
When a borrower isn’t able to put a certain amount of cash towards a new home, the lender has to provide a larger amount of money for the purchase. Accepting this lower amount of money upfront for the home loan increases the risk of the loan for the lender.
By requiring PMI, your lender reduces their risk of losing money if you can’t make your mortgage payments. In the event that you default on your loan, the private mortgage insurance coverage pays your lender part of the balance they’re owed.
How much does PMI affect my mortgage payment?
Depending on your home loan, you may pay between 0.5% and 1% of your full mortgage amount annually to cover your PMI. If you’re buying a home with a larger purchase price, you may have to pay several hundred dollars a month for PMI. The PMI payment is in addition to your normal mortgage costs of principal, interest, home insurance, and taxes.
Over the life of your loan, PMI payments can add up. Once your mortgage balance is less than 80% or the original appraisal or current market value for your home, you may be able to cancel PMI on your mortgage. However, the process for canceling PMI can be difficult and you will need to work with your lender and PMI provider to navigate this process.
Can I avoid paying PMI without paying 20% down?
One common way to avoid PMI without 20% down is to take out a second mortgage at the same time you take out your first mortgage. Sometimes called a “piggyback mortgage,” this strategy uses the first mortgage to purchase 80% of the home. The remaining cost of the home is covered by your second mortgage and down payment. Both mortgages are an amount that’s under 80% of the total home value, making PMI unnecessary. One downside to this is having two separate mortgages and the associated payments and interest that will need to be managed.