Private mortgage insurance is insurance imposed on ‘high risk’ mortgage loans.
More Info: Private mortgage insurance (PMI) is coverage that banks impose on borrowers who are financing more than 80% of a home loan. PMI is usually seen in first-time buyer situations where the buyer has some money for a down payment, but less than 20%. This is especially true with FHA loans, which require a much lower down payment — between 3.5 and 5%. With the buyer financing at least 95% of the purchase price in this instance, PMI is required.
What PMI Does
Private mortgage insurance covers the lender in case the buyer fails to pay the loan. PMI offsets the bank’s losses in the instance of loan default. This makes banks more apt to offer loans to first-time homebuyers and buyers who don’t have large down payments ready, since lenders can feel more secure with the “safety net” of PMI.
Payment Specifics for PMI
Annually, private mortgage insurance typically costs between one-half percent to one percent of the loan amount. This figure is divided monthly and, like homeowner’s insurance, is paid as part of the monthly mortgage. For example, on a $250,000 loan with 3.5% down ($8750), the loan amount would be $241,250. If PMI costs one-half percent in this example, then the annual cost of PMI would be $1206.25. So $100.52 would be added to the monthly payment to cover PMI.
How Long Do I Pay PMI?
There are ways to stop PMI early, including getting a “piggyback loan” to cover the gap between your lower down payment and 20% of the cost of the home. If getting another loan isn’t attractive, the best way to get rid of the need for PMI is to increase equity. As soon as the homeowner has made enough mortgage payments to get to the 20% equity level, PMI can be cancelled.