Buying a home comes with many costs, especially if you are taking out a mortgage loan to purchase it. If you plan to take out a traditional mortgage loan, you may be able to count on Private Mortgage Insurance (PMI).
Here’s what private mortgage insurance is, who is responsible for getting it, and what type of coverage it offers.
What is Private Mortgage Insurance and when is it needed?
PMI is a type of insurance coverage that a mortgage lender may need to protect against potential losses if a homeowner defaults on their home loan. According to the Consumer Financial Protection Bureau (CFPB), it may be required if you have a traditional mortgage loan and have less than 20% equity stakes on a home, or refinance your mortgage loan and have less than 20% equity remaining in the property.
A home loan with a lower down payment poses a greater risk to lenders because there is less home equity. However, with the security of PMI, a lender may find it easier to accept a higher-risk borrower. PMI does not protect the buyer in any way. Unlike home insurance, it doesn’t cover your property if there is damage or loss.
On average, PMI costs between 0.2% and 2% of your total loan amount per year. However, this can vary by lender, location, loan details, or even credit history.
PMI is not included in government-backed mortgages — like an FHA loan or a VA loan. These mortgage programs have their own types of coverage and associated costs that may be required such as: B. Mortgage Premium Insurance (MPI), which is paid both monthly and when taken out.
4 different types of PMI
There are different forms of personal mortgage insurance that determine how and by whom the policy is paid.
1. 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 in most cases they can be paid separately.
Once your PMI requirement is canceled — whether you refinance the home or meet the required equity threshold — that monthly payment is gone.
2. Single Premium Mortgage Insurance (SPMI)
With mortgage insurance with a single premium, you pay for your insurance cover in one sum. The policy will continue to protect your lender until your need decreases, but you are not responsible for the monthly premium payments.
This type of PMI comes with a higher upfront cost but results in a lower monthly mortgage payment. However, if you are able to remove PMI sooner than expected (either due to a market shift or by refinancing your home), those prepaid premiums will be lost.
3. Split-premium mortgage insurance
As the name suggests, split premium mortgage insurance allows you to split your PMI costs. You pay a portion of your premiums up front when you sign up. The other part is broken down into monthly premiums and is usually factored into your mortgage payment. This results in higher initial costs but lower ongoing monthly costs.
4. Lender-Paid Mortgage Insurance (LMPI)
With lender-paid mortgage insurance, your mortgage lender pays the bill for the policy. This can reduce your monthly payments and your mortgage prepayments, but it comes at a price: most lenders charge a higher amountin exchange. This can increase your overall expenses over the life of the loan, especially if you plan to stay indoors for a long time.
How to get rid of PMI
You can contact your mortgage lender once your loan repayment reaches the 20% equity threshold. While your lender is not legally required to remove PMI at this time, they must remove it once your home loan reaches 22% equity.
You can also contact your lender to ask about PMI removal if your home’s value has increased significantly since you bought it. If your lender is willing to remove the PMI requirement in these circumstances, they may require you to obtain a new home appraisal.
You may also be able to refinance your mortgage loan to remove PMI if your property’s value has increased since you bought the home. Just remember that there are additional costs associated with refinancing, so make sure you carefully calculate your potential long-term savings.
take that away
A 20% down payment on a traditional mortgage loan is no longer a standard requirement. However, if you pay a lower down payment, your mortgage lender may require you to buy PMI in exchange, which could cost you in the long run.
This coverage, which is purchased at your expense and typically paid as a monthly premium, protects your lender if you default on your mortgage loan until there is sufficient equity in the property. PMI can be removed once equity is built up or when the market value of the property increases.