Buying a home involves many expenses, especially if you use a mortgage for the purchase. If you are considering taking out a conventional mortgage, one possible cost you may encounter is private mortgage insurance (PMI).
Here’s an overview of what private mortgage insurance is, who is responsible for buying it, and what kind of coverage it offers.
What is private mortgage insurance and when is it required?
PMI is a type of insurance coverage that a mortgage lender may require in order to protect against potential loss if a homeowner defaults on their home loan. This may be necessary if you have a conventional mortgage and are putting less than 20% on a home or are refinancing your mortgage and leaving less than 20% equity remaining in the property, according to the Consumer Financial Protection Bureau (CFPB). .
A home loan with a small down payment represents a greater risk for lenders because there is less established home equity. With the security of PMI, however, a lender may find it easier to accept a higher risk borrower. PMI does not protect the buyer in any way. Unlike a home insurance policy, it does not provide coverage on your property in the event of damage or loss.
On average, PMI costs between 0.2% and 2% of your total loan amount per year. However, this can vary depending on the lender, location, loan details, or even credit rating.
PMI is not included in government-backed mortgages – such as an FHA loan or a VA loan. These mortgage programs have their own types of coverage and related costs that may be required, such as Mortgage Premium Insurance (MPI) which is paid monthly and at closing.
4 different types of PMI
There are different forms of private mortgage insurance, which determine how the policy is paid for and by whom.
Borrower Paid Mortgage Insurance (BPMI)
This is the most common type of PMI and requires the borrower to pay a mortgage insurance premium for the duration of the PMI requirement. These premiums are usually included in the monthly mortgage payment, but can also be paid separately in most cases.
Once your PMI requirement is waived – whether you refinance the home or reach the required capital threshold – that monthly payment will decrease.
Single Premium Mortgage Credit Insurance (SPMI)
With Single Premium Mortgage Insurance, you pay for your coverage in one payment. The policy will continue to protect your lender until your needs decrease, but you will not be responsible for paying premiums each month.
This type of PMI involves a higher upfront cost, but results in a lower monthly mortgage payment. However, if you manage to get the PMI removed sooner than expected (either due to a market change or by refinancing your home), those prepaid premiums will be forfeited.
Split Premium Mortgage Insurance
As the name suggests, split premium mortgage insurance allows you to spread your PMI costs. You will pay a portion of your premiums upfront at closing. The other part will be divided into monthly premiums and generally integrated into your mortgage payment. This results in a higher initial cost, but lower ongoing monthly costs.
Lender Paid Mortgage Insurance (LMPI)
With lender paid mortgage insurance, your mortgage lender will foot the bill for the policy. This can lower your monthly payments and your initial mortgage costs, but it comes at a price: most lenders will charge a higher amount. interest rate in exchange. This can increase your total cost over the life of the loan, especially if you plan to stay in the house for a long time.
How to get rid of the PMI
You can contact your mortgage lender once your loan repayment reaches the 20% equity threshold. Although your lender is not legally required to remove the PMI at this point, they must remove it once your home loan reaches 22% principal.
You can also contact your lender to ask them to remove the PMI if the value of your home has increased significantly since you bought it. If your lender is willing to waive the PMI requirement in this circumstance, they may require you to obtain a new home appraisal.
You may also be able to refinance your mortgage to remove the PMI if your property value has increased since you bought the house. Remember that refinancing comes with additional costs, so be sure to calculate your potential long-term savings.
The take-out sale
The 20% down payment on a conventional mortgage is no longer a standard requirement. However, if you make a smaller down payment, your mortgage lender may require you to purchase PMI in exchange, which could cost you dearly in the long run.
This coverage, which is purchased at your expense and usually paid as a monthly premium, protects your lender in the event of default on your mortgage until sufficient equity is established in the property. The PMI may be removed once this capital is built up or if the market value of the property increases.