Private Mortgage Insurance, Explained

Private Mortgage Insurance, Explained

Private Mortgage Insurance, Explained

When you purchase a home, you are required to get homeowner’s insurance as a condition of getting a mortgage. This insurance provides you with financial compensation if your home is damaged or destroyed. You may also need to have private mortgage insurance under certain circumstances. PMI protects your lender if you end up in a foreclosure situation.

How Does PMI Work?

You must have PMI if you are getting a conventional mortgage and your down payment on a home is less than 20 percent. When your house is sold in foreclosure, your lender will receive the proceeds from the sale. If your home was sold for less than the amount owed on the mortgage, then the PMI will pay your lender most or all the difference. For instance, if your house went into foreclosure and was sold for $200,000 but the mortgage on the home was $250,000, your lender will receive $200,000 plus up to another $50,000 for the PMI payment.

If you want a conventional mortgage, but you don’t have enough money to make a 20 percent down payment, then getting PMI can make it easier for you to get this type of loan. You will still need to meet other mortgage qualifications such as credit score and income requirements.

Cost

On the downside, PMI will increase the amount of your mortgage. The additional cost is generally 0.5 to 1 percent of your mortgage. So, if your mortgage is $300,000, your PMI can cost up to $3,000. You have the option of paying the PMI premium in one lump sum as part of the closing cost of your mortgage, or you can pay the PMI premium as part of your monthly mortgage payment.

Avoiding PMI

There are several ways you can avoid having to pay for PMI, which include:

• Make a minimum 20 percent down payment on a home with a conventional mortgage
• Get a government insured loan like an FHA or VA loan
• Ask your lender to drop the PMI once your mortgage is 80 of your home’s value

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