A:

Private mortgage insurance (PMI) is a type of insurance policy that protects lenders from the risk of default and foreclosure, allowing buyers who are unable to make a significant down payment (or those who choose to not to) to obtain mortgage financing at affordable rates. If you purchase a home and put down less than 20%, your lender will minimize its risk by requiring you to buy insurance from a PMI company prior to signing off on the loan.

Private mortgage insurance benefits the lender (the sole beneficiary of PMI), but it can add up to a sizable chunk of your monthly house payments. Typically, you send one payment to your lender each month to cover both the mortgage (principal plus interest) and the insurance premium. PMI rates vary, but may range between 0.3% and 1.2% of the loan amount on an annual basis. Your rate will depend on several factors, including:

  • Size of your down payment. PMI will cost less if you have a larger down payment (and vice versa).
  • Your credit score. The higher your credit score, the lower your PMI premium.
  • Potential for property appreciation. If you live in a market with declining property values, your PMI premium might be higher.
  • Loan type. The riskier the loan is to the lender, the higher your PMI.
  • Borrower occupancy. If the financed property will be owner-occupied (you will be living there), your PMI premium will be lower than if it is a rental or investment property.

Assume you have a 30-year 4.5% fixed-rate mortgage for $200,000. Your monthly mortgage payment (principal plus interest) would be $1,013.

If PMI costs 0.5%, you would pay an additional $1,000 per year, or $83.33 each month, bringing your monthly house payment up to $1,096.70. You may also be able to pay your PMI upfront in a single lump sum, eliminating the need for a monthly payment. This can be paid in full at closing or financed into the mortgage. In many cases, this is the more affordable option as long as you plan on staying in the home for at least three years. For the same $200,000 loan, you might pay about 1.4% upfront, or $2,800. Ask your lender for details on your PMI options before making any decisions

RELATED FAQS
  1. Why do I need to pay private mortgage insurance (PMI)?

    Private mortgage insurance (PMI) is a type of insurance policy that protects lenders from the risk of default and foreclosure, ... Read Full Answer >>
  2. What are the different types of private mortgage insurance (PMI)?

    Private mortgage insurance (PMI) is an insurance policy that protects lenders from the risk of default and foreclosure, and ... Read Full Answer >>
  3. What's the difference between private mortgage insurance (PMI) and mortgage insurance ...

    Private mortgage insurance (PMI) is an insurance policy used in conventional loans that protects lenders from the risk of ... Read Full Answer >>
  4. How can I avoid paying private mortgage insurance (PMI)?

    Private mortgage insurance (PMI) is an insurance policy that protects lenders from the risk of default and foreclosure, and ... Read Full Answer >>
  5. Can I take my 401(k) to buy a house?

    Once you reach 59.5, you can use the funds in your 401(k) retirement savings account to buy a house or any other expense ... Read Full Answer >>
  6. Can I take my 401(k) to buy a house for my children?

    Under the standard regulations for 401(k) retirement savings plans, you may elect to withdraw funds from your 401(k) for ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  2. Credit & Loans

    5 Signs a Reverse Mortgage Is a Good Idea

    If these five criteria describe your situation, a reverse mortgage might be a good idea for you.
  3. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
  4. Insurance

    Umbrella Insurance: You May Need It, Too

    If you have assets to protect – or just run a business from home – you could be unpleasantly surprised at how much you need umbrella insurance.
  5. Home & Auto

    Avoiding the 5 Most Common Rent-to-Own Mistakes

    Pitfalls that a prospective tenant-buyer could encounter on the road to purchase – and how not to stumble into them.
  6. Home & Auto

    Renting vs. Owning: Which is Better for You?

    Despite the conventional wisdom, renting might make more financial sense than you think.
  7. Credit & Loans

    Guidelines for FHA Reverse Mortgages

    FHA guidelines protect borrowers from major mistakes, prevent lenders from taking advantage of borrowers and encourage lenders to offer reverse mortgages.
  8. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  9. Insurance

    Who is a Beneficiary?

    A beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
  10. Home & Auto

    The Pros and Cons of Owner Financing

    Details on the upside and risks of this type of deal for both the owner and the buyer.
RELATED TERMS
  1. Private Mortgage Insurance - PMI

    A policy provided by private mortgage insurers to protect lenders ...
  2. Equity

    The value of an asset less the value of all liabilities on that ...
  3. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the ...
  4. Reinsurance Assisted Placement

    Insurance business that is developed with the help of a reinsurance ...
  5. Franchise Cover

    A type of reinsurance plan in which the claims from a number ...
  6. Mass Merchandising

    A method of selling insurance policies in which an employer or ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!