What is Private Mortgage Insurance, and do You Need it?
Private Mortgage Insurance, or PMI for short only applies to borrowers with 20% down payment or less on their home purchase. This insurance is a pool of securities used by the mortgage lender to deal with borrowers defaulting on their loans and it enables the lender to recover costs after foreclosure on the home. This offsets the risk of lenders providing loans with lower down payments.
How are Mortgage Insurance Rates Calculated?
Your private mortgage insurance rate will be calculated based on the following factors:
- Property location
- Down payment or loan to value
- Loan term
- Occupancy (Primary residence or 2nd home)
- Purchase or Refinance
- Credit score
Options For Mortgage Insurance
Your mortgage lender has access to (3) different types of private mortgage insurance options for you to choose from:
- It can be paid up front as lump sum
- Paid monthly as part of your payment
- Priced into your interest rate (Lender Paid Mortgage Insurance)
When will you expect to stop paying the PMI?
Once your principal loan amount has reached 78% loan to value, your PMI will be automatically removed from your lowering your mortgage payment. This will also allow you to pay more towards your principal which translates into to paying your loan off sooner.
Which Loan Products require Private Mortgage Insurance?
Private Mortgage Insurance (PMI) applies to most conventional loans unless you go with an upfront lump payment option or Lender Paid Mortgage Insurance option. FHA loans guaranteed by the Federal Housing Administration have their own mortgage insurance with different requirements, while VA loans backed by Veterans Administration don’t require any monthly mortgage insurance despite allowing 0% down payments. Keep in mind VA loans are only eligible to active military member, veterans, and surviving spouses who can obtain a certificate of eligibility.