Why do I need to pay private mortgage insurance (PMI)?

By Jean Folger AAA
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 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. As the borrower, you end up paying the PMI premiums but your lender is the sole beneficiary.

If you have monthly PMI, you continue to make PMI payments every month until your PMI is either terminated (when your loan balance is scheduled to reach 78% of the original value of your home); when it is cancelled at your request because your equity in the home reaches 20% of the purchase price or appraised value (your lender will approve a PMI cancellation only if you have adequate equity and have a good payment history); or when you reach the midpoint of the amortization period (a 30-year loan, for example, would reach the midpoint after 15 years).

If you have a single-premium PMI, your pay the premium upfront in a single lump sum, eliminating the need for a monthly PMI payment. The premium can be paid in full at closing or financed in to the loan. With lender-paid PMI (LPMI), the cost of the PMI is included in the mortgage interest rate for the life of the loan. This can make a lower monthly mortgage payment, but you will end up paying more in interest over the life of the loan. And, unlike monthly PMI, you don't get to cancel or terminate LPMI because it is a permanent part of the loan.

You can avoid paying PMI by making a down payment that is at least 20% of the purchase price of your home. You may also qualify for a piggyback mortgage, in which a second mortgage or home equity loan is taken out along with the first mortgage. In an "80-10-10" piggyback mortgage, for instance, 80% of the purchase price is covered by the first mortgage, 10% is covered by the second loan, and the final 10% is covered by your down payment. This lowers the loan-to-value (LTV) of the first mortgage to under 80%, eliminating the need for PMI.

RELATED FAQS

  1. How might having insurance increase moral hazard?

    Would you drive safely if your insurance company knew nothing about your driving habits? Learn how insurance increases moral ...
  2. What is the underwriter's job in a real estate transaction?

    Find out why the underwriter may be the most important person in your real estate transaction, and learn what information ...
  3. What are examples of risks for all underwriter types?

    Learn about the risks faced by different types of underwriting activity. Explore specific examples of risks faced by insurance ...
  4. How does insurance underwriting differ from investment underwriting?

    Understand the difference between insurance underwriting and investment underwriting, including what types of risks an underwriter ...
RELATED TERMS
  1. Private Mortgage Insurance - PMI

    A policy provided by private mortgage insurers to protect lenders ...
  2. Commercial Package Policy (CPP)

    An insurance policy that combines coverage for multiple perils, ...
  3. Buffer Layer

    The difference between the primary limit of insurance and any ...
  4. Anti-Stacking Provisions

    An insurance policy provision which prevents more than one limit ...
  5. As Their Interests May Appear (ATIMA)

    Text in an insurance policy that allows other parties to be added ...
  6. Back Pay

    The amount of salary and other benefits that an employee claims ...

You May Also Like

Related Articles
  1. Home & Auto

    How To Get Rid Of Private Mortgage Insurance

  2. Term

    Private Mortgage Insurance - PMI

  3. Economics

    The Importance Of The Purchasing Managers' ...

  4. Home & Auto

    Automatic Cancellation Of PMI When You're ...

  5. Home & Auto

    6 Reasons To Avoid Private Mortgage ...

Trading Center