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.
