Private mortgage insurance (PMI) is a
type of insurance that lenders require borrowers to purchase if they make a
down payment of less than 20% on a conventional mortgage. PMI protects the
lender not the borrower in the event that the borrower defaults on the loan.
PMI works by insuring the lender
against losses if the borrower stops making payments on the mortgage. If the
borrower defaults, the PMI company will reimburse the lender for the remaining
balance of the loan.
PMI is typically paid as a monthly premium
that is added to the borrower's mortgage payment. The amount of the PMI premium
depends on a number of factors, including the borrower's credit score, down
payment amount, and the type of mortgage.
Borrowers can cancel PMI once they
have built up enough equity in their home excepting if they have mortgage
insurance with a FHA loan, then the 1.75% is permanent until they can sell or
refinance to a conventional loan. Generally, borrowers can cancel PMI when
their equity reaches 20% of the original purchase price of the home. However,
some lenders may require borrowers to have 22% or 25% equity before they can
cancel PMI.
The six big mortgage insurance
companies are: Essent MGIC Radian NMI Enact and Arch. There is lender paid
mortgage insurance or borrower paid insurance. It can be paid upfront for a bit
lower interest rate or monthly over time.
Here is a step-by-step explanation of
how PMI works:
1. A
borrower applies for a conventional mortgage with a down payment of less than
20%.
2. The
lender requires the borrower to purchase PMI.
3. The
borrower pays a monthly PMI premium to the PMI company.
4. The PMI
company insures the lender against losses if the borrower defaults on the loan.
5. If the
borrower defaults on the loan, the PMI company reimburses the lender for the
remaining balance of the loan.
Benefits of PMI
PMI can be beneficial for both
borrowers and lenders. For borrowers, PMI can make it possible to qualify for a
mortgage even if they don't have a 20% down payment. For lenders, PMI protects
them against losses if borrowers default on their loans.
Drawbacks of PMI
PMI can be a costly expense for
borrowers. The PMI premium can add hundreds or even thousands of dollars to the
borrower's monthly mortgage payment. Additionally, borrowers may have to pay
PMI for several years, even if they make their mortgage payments on time.
How to avoid PMI
There are a few ways to avoid PMI:
- Make a down
payment of at least 20% on your mortgage.
- Get a piggyback
loan, which is a second mortgage that is used to cover the down payment.
- Ask your lender
about lender-paid PMI (LPMI). LPMI is a type of PMI that is paid by the
lender, not the borrower. However, LPMI is not available from all lenders
and it can be more expensive than borrower-paid PMI.
PMI is a type of mortgage insurance that
lenders require borrowers to purchase if they make a down payment of less than
20% on a conventional mortgage. PMI protects the lender in the event that the
borrower defaults on the loan. PMI can be beneficial for borrowers, but it can
also be a costly expense. There are a few ways to avoid PMI, such as making a
down payment of at least 20% or getting a piggyback loan.
