What is PMI?
If you put less than 20% down when you purchase a home, you will typically need Private Mortgage Insurance, also called PMI. Arranged by the lender and provided by a private insurance company, PMI protects the lender if the borrower stops making mortgage payments.
Is it popular?
Loans that require PMI are not uncommon. Many home buyers, especially first-time buyers, don’t have the cash required for a 20% down payment. This is understandable when you know that the average U.S. home value is $184,600 and a 20% down payment is nearly $37,000! So it isn’t surprising that more homebuyers require PMI as evidenced in Private Mortgage Insurance Companies reporting strong results for the first part of this year.
What does it cost?
Your specific PMI cost will depend on the size of your mortgage loan, the down payment you paid, the length of your loan and your credit score. For example, a buyer with a credit score of 739 who makes a 5% down payment and takes out a $200,000 conventional mortgage might pay about $185 a month in PMI (example from Encompass Staging Environment, 8-25-16).
How is it calculated?
Your PMI will be calculated by your lender on an annual basis and then divided up into 12 monthly premiums. It’s added to your mortgage payment and you’ll find it, in most cases, listed under “Insurance” on your monthly mortgage statement.
What’s PMI for?
PMI covers a percentage of the lender’s loss, if you fail to make the payments on your mortgage and default on that loan. That’s why your mortgage servicer will require you to continue your PMI coverage until you’ve paid down the balance and the property’s appreciated enough for you to have 20% to 22% equity in your home. In other words, the balance on your mortgage has been reduced to at least 80% of the property’s current market value. In essence, you’ve paid 20% of your home’s value.
Where does this 20% rule come from?
The minimum down payment is among the many rules set by the two government sponsored entities, Fannie Mae and Freddie Mac. These two companies buy the great majority of conforming mortgages. Lenders who want to sell their loans to Fannie and Freddie must ensure that every loan meets or conforms to their minimum standards, like the 20% down rule. Simply put, in the absence of 20% down, other acceptable precautions, like PMI, are taken to ensure that the loan will be paid and the lender’s risk will be limited.
What are the alternatives?
A conventional loan is not directly guaranteed by a federal agency unlike loans that are backed by the Department of Veterans Affairs (VA) and Federal Housing Administration (FHA). Borrowers who qualify for VA loans make no down payment and don’t pay any form of mortgage insurance. A good reason to consider a VA loan if you’re eligible.
If you have below-average credit and don’t qualify for a conforming loan and you’re not a veteran, you can turn to FHA mortgages. The FHA does require an up-front premium of 1.75% of the amount you’re borrowing. As a result, you may spend less on a conforming loan and PMI than with an FHA loan and FHA mortgage insurance. But it doesn’t hurt to ask your lender to run the numbers for you and make sure.
That’s why we’re here. There’s more information on PMI on our web site here and our Home Loan Specialists are available to help you by phone. Give us a call at 1-800-700-9212, weekdays from 8 a.m. to 10 p.m. and Saturday 8 a.m. to 5 p.m. Ask about PMI if you don’t have a 20% down payment. If you’re currently paying PMI on your mortgage and want to drop it, we may have some suggestions for you. Remember there’s no obligation. We’re here to help. We’ve got the loan to take you home.