Private mortgage insurance, or PMI, is something most first time home buyers encounter during their journey towards a home purchase.
But despite the fact that it’s so common, PMI is something that many people don’t fully understand or know about as they begin the home buying process.
Here, we’ll delve into the details of private mortgage insurance and answer some frequently asked questions about this aspect of purchasing a home.
Commonly referred to as PMI, private mortgage insurance is a type of insurance that protects the lender’s investment. Essentially, it protects the institution providing you with your mortgage to help you finance your home purchase in case you stop making payments on your loan for any reason.
PMI is often built right into your monthly mortgage payment. In most cases, it does not have to be paid for the entire life of the loan.
This quick, one-minute video will give you an overview of the key things you need to know about PMI as you’re working through the home purchase process.
PMI is required when purchasing a home via a conventional loan where the loan amount is greater than 80% of the property value or purchase price.*
In other words, private mortgage insurance is required when a buyer secures a conventional home loan but puts less than 20% down.
*Note: For those who qualify, there are ways to avoid making a monthly mortgage insurance payment by opting to “buy out” the mortgage insurance. Contact us to learn more about this option and to find out if you qualify.
PMI may seem like an extra expense when it comes to purchasing a home, but in reality it provides a significant benefit for home buyers. The main benefit of private mortgage insurance for home buyers is that it enables them to make a smaller down payment. By eliminating the need for a 20% down payment, PMI makes it more feasible for more people to purchase homes.
Learn more about how private mortgage insurance impacts down payments here.
The two most common types of mortgage insurance are borrower paid mortgage insurance (BPMI) and lender paid mortgage insurance (LPMI).
Borrower Paid Mortgage Insurance (BPMI)
BPMI is made up of a predetermined monthly premium that is added to your monthly mortgage payment.
In some cases, you’ll continue paying the premium as part of your monthly payment until you’ve invested 20% equity into the property. Once you’ve reached that 20% threshold, you can refinance out of the PMI. In other words, you can adjust your financing so you no longer need to pay the monthly mortgage insurance premium.
If you are paying for mortgage insurance that goes away automatically, you won’t need to refinance out of it. Once you have reached a loan-to-value ratio of 78% (in other words, 22% equity in the home), the PMI payments will fall off automatically based on an amortization schedule. In this scenario, if you believe your home appreciated at a faster rate or you did upgrades and feel it is at 80% LTV, then you have the option of refinancing to remove the PMI – but otherwise once the lender sees it hit 78% from the appraisal value/sales price (the lower of the two), payments for PMI will automatically fall off.
Lender Paid Mortgage Insurance (LPMI)
With lender paid mortgage insurance, instead of paying a monthly premium for mortgage insurance, you can pay a slightly higher interest rate so that the lender can cover the cost of the mortgage insurance. Put another way, you can waive the monthly PMI premium amount in exchange for a slightly higher interest rate.
Typically, the monthly payment amount for loans with LPMI is lower than for those with BPMI.
As mentioned previously, most home buyers can stop paying private mortgage insurance when they’ve reached 20% equity in the home they are purchasing.
If your private mortgage insurance is set to go away automatically based on an amortization schedule, it will disappear automatically when you reach 22% equity in your home (when the loan-to-value ratio reaches 78%).
There are options to consider if you want to terminate your private mortgage insurance early. Refinancing your home, paying off your mortgage faster, and having your home reappraised are three ways you can terminate PMI earlier than originally expected.
You can find more details on the different ways to get rid of PMI here.
Curious about how PMI will impact you and your mortgage specifically? Wondering if BPMI or LPMI is the better option for you? Don’t hesitate to reach out!
Our team of mortgage professionals would be happy to walk you through your options and explain the details of private mortgage insurance. Give us a call at 518-782-1202 or contact us online and we’ll get right back to you with the information you’re looking for.
Think you’re ready to move forward with securing a home loan? Take the first step today by completing our quick and easy mortgage pre-approval form!
Looking for more insight about buying your first home? Check out our first time home buyer resources to learn more about what to expect when it comes to buying a home for the first time.