What Is PMI? Private Mortgage Insurance Defined And Explained
Author:
Victoria ArajMar 12, 2024
•9-minute read
When you take out a mortgage to purchase or refinance a home, you may be required to pay for mortgage insurance. Private mortgage insurance (PMI), is a common mortgage insurance that is required for conventional loan borrowers who make low down payments on the purchase of their home.
Let’s talk about what PMI is, how it works and what it means for you.
What Is PMI?
PMI is a type of insurance that may be required for conventional mortgage loan borrowers when they buy a home and make a down payment of less than 20% of the home’s purchase price, PMI may become a part of your mortgage payment. It protects your lender if you stop making payments on your loan.
For example, if you buy a home for $200,000, you’ll likely need a down payment of $40,000 to avoid paying PMI. After you’ve bought the home, you can typically request to stop paying PMI once you’ve reached 20% equity in your home. PMI is often canceled automatically once you’ve reached 22% equity.
PMI only applies to conventional loans. Other types of loans often include their own types of mortgage insurance. For example, FHA loans require mortgage insurance premiums (MIP), which operate differently from PMI.
Types Of PMI
There are two types of PMI to be aware of, borrower-paid and lender-paid PMI.
Borrower-Paid PMI
Borrower-paid PMI (BPMI) is the most common type of PMI. BPMI simply adds an insurance premium to your regular monthly mortgage payment.
Lender-Paid PMI
If you have lender-paid PMI (LPMI), your lender will pay your mortgage insurance premiums as a lump sum when you close the loan, and you’ll pay it back by accepting a higher interest rate.
You may also have the option to pay your entire PMI yourself at closing, which would not require a higher interest rate. Depending on the mortgage insurance rates at the time, this may be cheaper than BPMI, but keep in mind that it’s impossible to “cancel” lender-paid PMI because your payments are made as a lump sum upfront.
If you wanted to lower your mortgage payments, you’d have to refinance to a lower interest rate, instead of removing mortgage insurance.
It’s important to discuss private mortgage insurance and which type your lender plans to use in advance so you know what to expect in terms of your monthly payments and interest rate.