Mortgage Basics

Private Mortgage Insurance

Private Mortgage Insurance (PMI) is a type of insurance policy that protects lenders from the risk of default and foreclosure. PMI is typically required by lenders when a homebuyer makes a down payment of less than 20% of the home's purchase price. By providing this insurance, lenders are able to offer loans to buyers with smaller down payments, thereby increasing homeownership accessibility. Here's what you need to know about PMI:

How PMI Works

  • Purpose

    PMI minimizes the lender's risk in cases where the borrower's equity in the home is less than 20%. It ensures that the lender can recover a portion of the loan amount if the borrower fails to make payments and the property goes into foreclosure.

  • Payment

    PMI premiums are paid by the borrower, either monthly as part of the mortgage payment or upfront at closing. In some cases, it can be a combination of both.

  • Cost

    The cost of PMI can vary depending on the size of the down payment, the loan amount, the borrower's credit score, and the type of mortgage. Typically, PMI costs range from 0.3% to 1.5% of the original loan amount per year.

Canceling PMI

  • Automatic Termination

    For home mortgages signed on or after July 29, 1999, PMI must automatically be terminated by the lender once the mortgage balance reaches 78% of the original purchase price, provided the borrower is in good standing.

  • Request for Removal

    Borrowers can also request the removal of PMI once their mortgage balance falls to 80% of the original purchase price or the current appraised value, assuming they meet certain criteria set by the lender, such as having a good payment history.

  • Refinance

    If the home has appreciated in value, refinancing the mortgage might also provide an opportunity to remove PMI if the new loan amount is less than 80% of the home's appraised value.

PMI for Different Types of Loans

  • Conventional Loans

    PMI is most commonly associated with conventional mortgages. The terms and requirements for PMI can vary by lender.

  • FHA Loans

    Loans insured by the Federal Housing Administration (FHA) require a Mortgage Insurance Premium (MIP), which serves a similar purpose to PMI but has different rules and costs. MIP is required for all FHA loans, regardless of the down payment size, and cannot always be removed during the life of the loan.

  • VA Loans

    Loans guaranteed by the Department of Veterans Affairs do not require PMI, even with no down payment, but they do have a VA funding fee.

Benefits and Drawbacks

  • Benefits

    PMI enables buyers to purchase a home with a smaller down payment, facilitating homeownership for those who might not otherwise afford it.

  • Drawbacks

    PMI increases the monthly mortgage payment and the overall cost of buying a home. It does not provide any coverage or benefits to the borrower.

If you have questions about PMI or any other part of the loan process, let's chat!

For information purposes only. This is not a commitment to lend or extend credit.

Information and/or dates are subject to change without notice. All loans subject to credit approval.

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