Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is a type of insurance required by many lenders when a homebuyer makes a down payment of less than 20% on a conventional mortgage loan. PMI protects the lender from financial loss if the borrower stops making mortgage payments.

Although the borrower pays the premium, the insurance coverage is designed to protect the lender, not the homeowner.

PMI allows many buyers to purchase a home sooner without waiting years to save a full 20% down payment.

When Is PMI Required?

PMI is typically required for conventional loans when the borrower’s down payment is less than 20% of the home’s purchase price or appraised value.

For example:

Government-backed loans such as FHA loans may have their own type of mortgage insurance, which works differently from PMI.

How Much Does PMI Cost?

The cost of PMI depends on several factors, including the loan amount, down payment, credit score, and loan-to-value ratio.

In most cases, PMI costs about 0.3% to 1.5% of the original loan amount per year.

Example:

PMI is usually paid as a monthly premium added to your mortgage payment, although some loan programs allow an upfront payment at closing.

How Does PMI Work?

PMI policies typically cover a portion of the lender’s risk if the borrower defaults on the loan.

Here’s how the process works:

1. The borrower purchases a home with less than 20% down.

2. The lender requires PMI to reduce their lending risk.

3. The borrower pays monthly PMI premiums along with their mortgage payment.

4. Once the borrower builds enough home equity, PMI can be removed.

This system allows lenders to approve mortgages for buyers with smaller down payments.

When Can PMI Be Removed?

The good news is that PMI is not permanent.

PMI can usually be removed when:

✔ You reach 20% equity in your home and request cancellation.
✔ Your loan balance reaches 78% of the original home value, when lenders must automatically remove it.

You may reach this point by:

• Making regular mortgage payments

• Making additional principal payments

• Increasing your home’s value through improvements or market appreciation

• Refinancing your mortgage

How to Avoid PMI

There are several strategies homebuyers can use to avoid PMI:

Make a 20% Down Payment

The most common way to avoid PMI is to put at least 20% down.

Consider Loan Program Options

Some loan programs allow low down payments without traditional PMI.

Use Lender-Paid PMI

Some lenders cover PMI in exchange for a slightly higher interest rate.

Piggyback Loans

Some buyers use a second loan to reach the 20% threshold.

Your loan officer can help determine which option works best for your financial situation.