What is private mortgage insurance?

If you get a conventional loan and make a down payment of less than 20 percent of the home price, you are required to purchase private mortgage insurance (PMI). PMI protects the lender (not you) in case you fail to make your mortgage payments.

Banks, savings associations, credit unions, and mortgage companies make conventional loans to creditworthy borrowers at interest rates based on market conditions. The federal government does not insure these loans.

It’s important to note that PMI pays for losses that a lender has because of foreclosure. It protects the lender in case you default on the loan. It will not pay your mortgage loan payments.

How does private mortgage insurance work?

PMI has an annual premium. This premium is divided by 12 in the form of a monthly charge added to your mortgage payment of principal, interest, (property) taxes, and (property) insurance (PITI). Even though you’re the one paying, PMI is protection for the lender in case you default on the loan.

How much does private mortgage insurance cost?

The cost of PMI varies. Generally, borrowers who are a higher credit risk (lower credit score) pay higher fees for private mortgage insurance.

When can I stop paying for private mortgage insurance?

PMI is automatically canceled when your mortgage balance reaches 78 percent of the original value of the house. However, there are exceptions. If you have a high-risk loan, have not been current on your payments, or have other liens on your property, your PMI may continue. You can also cancel your PMI through written request – with the exceptions listed above – when you reach 20% equity in your home based on the original property value.

Learn more about private mortgage insurance.

Photo by Ludovic Charlet on Unsplash


Recommended Articles

Allison’s Story: No Such Thing as Over-Prepared

Meet Allison, a Data Analyst who lives in Winooski, Vermont with her three roommates. What do you do? I am the Manager of Data Analytics for a home health and hospice agency. I’ve been here for a year and a half, and really love my job. I have a lot of autonomy, and I get… Read more

Should I Rent or Buy a Home?

Renting versus owning – how to determine which is right for you Choosing whether to own or rent a home is a big decision. The “right” answer for you will be deeply personal, based on a few key considerations that we will explore below. 1. Examine your personal values A good place to start is… Read more

What does it mean to refinance a mortgage?

Let’s start with the basics. Refinancing simply means that you’re replacing your existing loan with a new mortgage. Reasons for Refinancing a Mortgage If you’re considering refinancing, your reasons may include: A lower interest rate Shorter (or longer) term to pay off the loan or cash out equity Changing the type of mortgage (you may… Read more