Private mortgage insurance, or PMI, is a type of insurance that some homeowners pay when purchasing a house with less than 20% down. As such, you will pay more per month on your mortgage than you usually would before you reach 78% of the original value, when lenders are required by law to cancel PMI—provided you haven’t missed any monthly payments.
Here is what you should know about PMI before you purchase a home:
PMI Protects The Lender
It is important to remember that even though it is called private mortgage insurance, it protects your lender. It is not mortgage protection insurance!
If you default on a loan, it means you have failed to pay back a debt according to the initial agreement. PMI protects your lender from this by reimbursing them if you default on your loan and your house is not enough to repay the debt through a foreclosure sale.
There Are Multiple Ways You Can Pay For PMI
There are five different ways you can pay for PMI:
- Borrower-paid mortgage insurance: PMI is paid as an additional monthly fee with your monthly mortgage payments.
- Single-premium mortgage insurance: PMI is paid upfront as a lump sum at closing or financed into the mortgage.
- Lender-paid mortgage insurance: Your lender will “pay” for your PMI, but you will pay for it over the life of the loan in the form of higher interest rates.
- Split-premium mortgage insurance: A combination of borrower-paid and single-premium mortgage insurance.
- Federal home loan mortgage protection (MIP): A type of mortgage insurance used for loans underwritten by the FHA.
The most common way to pay for PMI is through borrower-paid monthly fees. Many homeowners find this the most convenient but always talk to your lender to find the best method for you.
The Amount You Will Pay Will Vary Upon Several Different Factors
The amount a homeowner will pay in PMI will depend upon a variety of factors such as:
- Credit score
- Loan type
- Down payment
Freddie Mac estimates that you will pay around $30 to $70 per month for every $100,000 borrowed. The cost of private mortgage insurance premiums will be shown on your closing disclosure, so review it carefully before proceeding.