PMI – What Is Private Mortgage Insurance (PMI)

what-is-pmi

If you're in the market for your first home, your loan officer may have mentioned that there are low down payment loan options available that require PMI, or private mortgage insurance. But exactly what is PMI? Private mortgage insurance (PMI) is a type of insurance that enables you to buy a home with less than a 20% down payment.

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Why is PMI required?

PMI is required is required on every loan that has less than a 20% down payment that is underwritten to Fannie Mae (FNMA) and Freddie Mac (FHLMC) standards. PMI provides protection for the lender to offset the higher risk of a low down payment. In the event of default or foreclosure, the PMI insurance company pays the lender a percentage of the original loan amount. Although the lender is receiving the benefit of PMI, the premium is paid by the borrower.

How much does PMI cost?

The exact amount of PMI depends on the specifics of the loan being insured. Typically PMI premiums range from .5% to 1.5% of the original loan amount per year, although the premium is generally paid monthly along with the mortgage payment.

Can you avoid PMI?

PMI can be avoided by keeping the loan amount to no more than 80% of the purchase price or value of the home. If you don't have a 20% down payment, you could consider a second mortgage to provide the additional funds required. Typically, with a second mortgage you will need to have at least a 5% to10% down payment.

What is the difference between PMI and government mortgage insurance?

Government loan programs such as FHA and VA loans also require mortgage insurance, but it is a different form of insurance provided by the government. In addition, the lending criteria and costs are also different for FHA or VA mortgage insurance. FHA and VA loans carry mortgage insurance regardless of the borrower's down payment.

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