What Is PMI?
Maybe you’ve heard the term thrown around by your lender or loan officer, you’ve spotted a “PMI” line item on your closing disclosure, or you’re seeing “PMI” on your escrow statements. Whatever the reason, you want to know: what is this PMI and why am I being forced to pay it?
For most people, PMI is an automatic part of homeownership—at least at the beginning of the loan term. It stands for private mortgage insurance, and most lenders require it (save for a few special situations, loan types, and sizeable down payments.)
Let’s take a look at PMI in more depth and answer a few of the most commonly asked questions.
What is PMI Mortgage Insurance?
PMI is designed to protect your lender in the event your loan defaults or goes into foreclosure. If you stop making payments or abandon the property, PMI pays your lender for their part of the remaining balance (at least partially). Just like your auto insurance policy, it safeguards the lender’s financial interests and their investment in you—and your home.
When is PMI Required?
Unless you can afford to put at least 20 percent down on your home, your lender is most likely going to require you pay PMI on your loan. PMI is almost always required on FHA loans (sometimes it’s called MIP on these mortgages), and it’s usually on conventional loans too, unless a massive down payment is involved. Many VA loans do not require PMI, and some credit unions will forgo it on their mortgage loans as well.
Piggybacking loans—which essentially means taking out multiple, shorter-term loans simultaneously—can also allow you to avoid PMI in some situations. Make sure you’re financially prepared to cover two monthly payments if you decide to go this route.
How and When Do I Pay?
Like other insurance policies, you can usually pay your premium on an annual or monthly basis. If you decide to escrow, you can usually lump in your PMI payment with your mortgage payment and other fees through your escrow account. This means issuing just one payment per month, making it easy to track and budget for.
You also may be able to pay a lump sum every year to cover PMI up front, or your lender may allow you to pay portions of your PMI at closing. Talk to your specific lender about PMI payments and how those will be structured before you close on your loan.
How Much Does PMI Cost?
Mortgage PMI rates vary, so your specific cost will really depend on your loan type, your credit score, your down payment, and more. Typically, the better your credit, the stronger your financial history and the higher your down payment, the better PMI rate you’re going to get. That means a lower monthly PMI payment on the whole.
In general, PMI is going to cost you about $30 to $70 for every $100,000 you borrow. If you took out a $200K loan, that means your PMI will likely run you around $60 to $140 per month. When you’re preparing to close on your loan, your lender should provide you with a loan estimate and closing disclosure that will break down what your PMI costs will be. Make sure to ask any questions up front, before closing, if you have concerns. Some lenders may offer different options for PMI; you can discuss these with your financial advisor, accountant or loan officer before making a decision.
How Long Do I Have to Pay it?
Most lenders require you to pay PMI until you have at least 20 percent equity in the home. That’s why, if you put down 20 percent up front, you might be able to avoid PMI from the outset.
Usually, once you reach your 20-percent mark (it typically takes five to 10 years), you must request PMI cancellation through your lender. You’ll want to reach out to them when the time comes to get the proper forms and paperwork. The process can sometimes take a few weeks or months to complete.
Other PMI Considerations
Though PMI may seem like just another fee and expense in the home buying process, it can actually be beneficial to a buyer—especially if they don’t have a ton of funds saved up for a down payment. It may allow them to purchase a home without spending years and years saving up, or it could help them qualify for types of loans they may have otherwise been unable to.
More PMI Questions or Concerns?
Do you have more questions about PMI? Want to inquire about what loan products do and don’t require private mortgage insurance or see what PMI rates you’d qualify for with your credit? Get in touch with Embrace Home Loans today. We’re here to help.