Key Takeaways
- PMI may be required when your down payment is under 20%.
- PMI costs can range up to 1.5% on your loan size annually.
- PMI goes away once you have 20% equity in your home.
- PMI adds to your monthly mortgage payment.
Article Summary
Private Mortgage Insurance (PMI) is insurance that protects lenders from losses when borrowers default on conventional mortgages with less than 20% down payment.
Private Mortgage Insurance (PMI): Explained in Plain English
Private Mortgage Insurance (PMI) is a type of insurance that conventional mortgage lenders require when home buyers make a down payment of less than 20% of the home's purchase price. PMI protects the lender from financial losses if the borrower defaults on the mortgage.
The PMI requirement applies to conventional mortgages, which are loans not backed by government agencies like the FHA, VA, or USDA. When a home buyer puts down less than 20%, the lender faces increased risk because the borrower has less equity in the property.
For example, if a first-time home buyer purchases a $300,000 home with a 10% down payment ($30,000), they would need PMI because their down payment is below the 20% threshold ($60,000). The PMI premium would be added to their monthly mortgage payment until they reach 20% equity in the home.
PMI costs typically range from 0.5% to 1.5% of the loan amount annually, though the exact rate depends on factors such as the borrower's credit score, down payment amount, and loan-to-value ratio. These premiums are usually paid monthly as part of the mortgage payment.
| Example Scenario | Home Price | Down Payment | Loan Amount | PMI Required? |
|---|---|---|---|---|
| First-time buyer, 5% down | $300,000 | $15,000 (5%) | $285,000 | Yes |
| Repeat buyer, 20% down | $400,000 | $80,000 (20%) | $320,000 | No |
| Buyer with 10% down, lower credit | $250,000 | $25,000 (10%) | $225,000 | Yes |
Common Questions About Private Mortgage Insurance (PMI)
Get answers to frequently asked questions about PMI, including requirements, costs, and removal options.
When is PMI required on a conventional mortgage?
PMI is required when the down payment is less than 20% of the home's purchase price or appraised value, whichever is lower. This applies to conventional mortgages, not government-backed loans like FHA mortgages.
How much does PMI cost?
PMI costs between 0.5% and 1.5% of the loan amount annually. For a $250,000 mortgage, this means $1,250 to $3,750 per year, or $104 to $313 per month. The exact cost depends on your credit score, down payment percentage, and loan-to-value ratio.
Can I avoid PMI without a 20% down payment?
Some lenders offer 'piggyback' loans where you take out a second mortgage to cover part of the down payment, potentially avoiding PMI. Another option is lender-paid mortgage insurance (LPMI), where the lender pays the PMI premium but may charge a higher interest rate.
How do I remove PMI from my mortgage?
PMI automatically terminates when you reach 22% equity based on the original purchase price. You may request PMI removal when you reach 20% equity, but you may need to pay for a new appraisal to prove the current value.
Does PMI benefit the borrower?
PMI primarily benefits the lender by protecting them from losses. However, it benefits borrowers by allowing them to purchase a home with less than 20% down payment, which might be their only option for homeownership.
How does PMI differ from FHA mortgage insurance?
PMI applies to conventional mortgages and can typically be removed once you reach 20% equity. FHA mortgage insurance applies to FHA loans and typically cannot be removed for the life of the loan unless you refinance to a conventional mortgage.
