What is PMI?

What is Private Mortgage Insurance (PMI)?

pmi_blog_post.jpg

Mortgage insurance, which is also known as Private Mortgage Insurance or PMI, is generally required when a homebuyer purchases a home with conventional financing using a down payment less than 20% of the purchase price of the home. PMI allows lenders to provide low down payment options, because it protects the lender in the event a borrower defaults on their home.

PMI is meant to protect lenders. But the benefits of PMI extends to borrowers, too. When lenders are protected from the risk of default, they are more willing to lend to borrowers who don’t have a traditional 20% down payment saved. That means more mortgage loan options and lower down payment options are available for you the homebuyer.

How Much Does Mortgage Insurance Cost?

Mortgage insurance typically costs between 0.5% and 1% of the entire loan amount annually. If you have a $200,000 loan at the higher PMI cost of 1%, your annual mortgage insurance premiums could total $2,000 each year. Your mortgage insurance may be tax deductible, depending on your income tax bracket. Please check with your accountant as to whether you can deduct your mortgage insurance.

What are my PMI Payment Choices?

There are a variety of choices available when paying PMI and each will vary based on your individual financial situation:

  • Borrower Paid Mortgage Insurance (Monthly Premium): This type of mortgage insurance is a monthly payment included as part of your monthly mortgage payment. This is the most common type of PMI.
  • Borrower Paid Mortgage Insurance (Single Premium):  This option allows you to eliminate the monthly mortgage insurance payment by paying the full cost of the mortgage insurance at closing or including it in the total cost of the loan amount.
  • Lender Paid Mortgage Insurance (Single Premium): This type allows a one-time upfront fee that is paid by the lender and eliminates the need for monthly PMI payments.  The lender typically covers the one-time upfront fee with a slightly higher interest rate over the duration of the loan.
  • Split Edge Mortgage Insurance: This option reduces your monthly PMI obligation by paying a percentage of the loan amount upfront – you can pay up to 1.25 percent.  The greater the upfront portion paid, the lower the monthly payment.