Private Mortgage Insurance (PMI)

What is Private Mortgage Insurance? 

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to 1-year's worth of PMI premiums at closing which can amount to several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask if you qualify for other loan options.

Could obtaining Private Mortgage Insurance (PMI) help me qualify for a larger loan?

Yes, it will help you obtain a larger loan, here’s why. Let's say that you are a family with $42,000 Annual Gross Income and monthly revolving debts of $800 for car payment and credit cards, and you have $10,000 for your down payment and closing costs on a 7%-interest mortgage. Without PMI the maximum price you can afford is $44,600, but with PMI covering the lender's risk you now can buy a $62,300 house. PMI has afforded you 39% more house.

How much does Private Mortgage Insurance cost?

PMI costs vary from insurer to insurer, and from plan to plan. Example: A highly leveraged adjustable-rate mortgage requires the borrower to pay a higher premium to get coverage. Buyers with a 5% down payment can expect to pay a premium of approximately 0.78% times the annual loan amount, $92.67 monthly for a $150,000 purchase price. But, the PMI premium would drop to 0.52% times the annual amount, $58.50 monthly if a 10% down payment was made.

How is Private Mortgage Insurance paid?

PMI fees can be paid in many ways depending on the company used:

  • Borrowers can choose to pay the 1-years premium at closing, and then an annual renewal premium is collected monthly as part of the house payment.
  • Borrowers can choose to pay no premium at closing, but add on a slightly higher premium monthly to the principal, interest, tax, and insurance payment.
  • Borrowers who want to sidestep paying PMI at closing but don't want to increase their monthly house payment can finance a lump-sum PMI premium into their loan. Should the PMI be canceled before the loan term expires through refinancing, paying off the loan, or removal by the loan provider, the borrower may obtain the rebate of the premium.

 

 

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