What Is Private Mortgage Insurance?

hands protect paper figures 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. The borrower is usually required to pay this insurance premium until they have paid off between 20 and 50 percent of the total amount borrowed on their primary home.

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.

With PMI in place, borrowers with small down payments can still purchase homes they may otherwise not be able to afford.

Borrower Benefits Of PMI

The idea of PMI can be intimidating to some potential homebuyers and can make them concerned over whether they will be able to afford monthly mortgage payments. However, even with PMI adding another fee to your monthly payment, your payments are still likely to cost less than rent.

If the payments are roughly the same or even slightly higher than your rent, remember that, unlike with renting, you are building up equity in your home. Equity is important because it has the potential to increase the value of your property over time.

If you were renting, you would not be building any equity, which means that if you stayed in your rental for five years, you would have missed out on all the growth that comes with owning a home. 

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. For many people, this makes the dream of homeownership a reality.

Calculating The Cost Of PMI 

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. However, this isn’t common because borrowers usually have PMI to begin with due to making smaller down payments.

At closing, you will receive a document that shows how much insurance is required and when it will end. The date that the insurance will end is typically the same date that your loan will be paid off. 

Canceling PMI

Once you believe you are eligible to cancel your mortgage insurance, you must submit a request in writing by certified mail return receipt requested to both your lender and your insurer. If you don’t follow the proper procedure for canceling PMI, you will be required to continue making monthly payments.

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.

One thing is certain: if you want to cancel PMI, you must submit written notice by certified mail return receipt requested.

Keep in mind you will only be eligible to request PMI cancelation once you reach 20 percent or more equity in the home.

Alternatives To PMI

Even if you are putting down less than 20 percent for your home purchase, there are other potential alternatives worth exploring that can enable you to avoid PMI. Lenders understand that not everyone has enough money for a 20 percent down payment and want to offer numerous options to their clients to make homeownership more affordable for them.

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.

One possibility is a loan modification, which can lower your interest rate or extend the terms of your loan so that you can afford to keep up with monthly payments. Refinancing your mortgage with more favorable terms, such as a lower interest rate, can also be a good solution for making monthly mortgage payments more affordable.