What Is Private Mortgage Insurance?

In the real estate industry, most lenders require borrowers who are applying for a mortgage to pay a fee called Private Mortgage Insurance (PMI) along with their monthly mortgage payments in certain situations.  

Why PMI Is In Place

PMI is an insurance policy that borrowers must purchase if their down payment is less than 20 percent of the home’s purchase price. This insurance protects your lender if you default on your loan, and the lender will not lose out on their investment.

Borrower Benefits Of PMI

Another benefit of PMI is that it allows homeowners to buy a home with a lower down payment. For example, a borrower with a $30,000 annual salary may not have been able to afford the standard 20 percent down payment on a $150,000 home without mortgage insurance.

PMI premiums typically cost between 0.5 percent and 1 percent of the original balance, and in most cases, can be wrapped into the mortgage payment to ensure that you aren’t burdened by a large upfront fee. Alternatively, it can be paid in a lump sum upfront at closing.

Calculating The Cost Of PMI 

Canceling PMI

Canceling your PMI doesn’t necessarily mean that you can get a refund on all of the premiums you paid throughout your loan. The laws regarding these refunds vary by state, so it is essential to check with your lender and insurance provider about the exact rules and time limits in your area.

Alternatives To PMI

Borrowers may not be required to pay PMI if they have a loan with an original term to maturity of 25 years or less and the loan amount does not exceed 80 percent of the home’s appraised value. Borrowers may also qualify for government-issued mortgages and don’t require PMI, such as VA loans or FHA loans.

If You Are Struggling With Your Payments

If you are struggling to make mortgage payments or are worried that you may default on your loan, it is important to contact your lender right away. Even if you cannot make your monthly mortgage payments, there are options available that will prevent your lender from immediately initiating foreclosure.

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