What is PMI? Everything to know about Private Mortgage Insurance

What is PMI? Everything to know about Private Mortgage Insurance

If you are in the process of buying a home, you may have heard of the term PMI, or private mortgage insurance. What is PMI exactly?
Private mortgage insurance is a type of insurance you are required to pay on a loan that has less than a 20% down payment. The PMI protects the lender in the event that the borrower defaults on their mortgage payment. If a buyer has a down payment of 20% or more, PMI is not required and will not be added to the loan.

Why Do I Have to Pay PMI?

In the viewpoint of the lender, a mortgage with a loan-to-value (LTV) ratio greater than 80% is viewed as a riskier investment. Because of this high risk loan, buyers are required to pay PMI for the lender’s protection for any mortgage with less than a 20% down payment.

How Does PMI Work?

Private mortgage insurance is typically paid monthly and is an additional expense that gets added to your monthly mortgage payment. Sometimes, it can be paid upfront at closing. Other times, your lender can pay your PMI for you, at the cost of a higher interest rate. You should consult with your lender for specific information pertaining to your financial situation.

How Much Does PMI Cost?

The cost of PMI will vary greatly, depending on your lender and your credit score at the time. Typically, it can be anywhere from 0.5%-1% of your loan cost annually, but sometimes it could cost more. Consult with your lender for specific details pertaining to your financial situation.

How Do I Get PMI Removed?

Your PMI will automatically get removed from your lender once the original value of your loan reaches a certain percentage. As the borrower, you will be able to request the removal of your PMI once your loan to value ratio reaches 80%.
The other way to get your PMI removed is to get an appraisal on your property once you’ve obtained enough home equity. If your new appraisal value of the home reaches 80% of your LTV, you may request to have your PMI removed. The appraisal will be at the homeowner’s expense.

The Bottom Line

Realistically, many home buyers will not always have a 20% down payment when purchasing a new home. Although PMI will be an added expense to your loan amount in these cases, the trade off of owning your own home is well worth it, especially when you consider the fact that PMI can be removed, sometimes in a matter of only a few years, thanks to the ever increasing rise of home values!
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