Depending on the type of loan and other factors, Private Mortgage Insurance (PMI) is something mortgage lenders generally require if you make a down payment that’s less than 20% of the cost of your home. Why? Because it protects the lender in case something happens and you default on your home loan.
Private Mortgage Insurance protects roughly the top 20% of the mortgage against default. So, if a default occurs, the lender sells the home and is reimbursed by the PMI company for any remaining amount up to the policy value. This allows lenders to protect their investments so they can stay in the business of offering great home loans to great people.
How Do You Pay Private Mortgage Insurance?
PMI rates vary depending on your insurer and your plan, which means the cost will vary as well – but the PMI fees can be paid in a variety of different ways. You can pay the first-year premium at closing, like we mentioned before, or you can choose to skip that payment and add on the premium into your mortgage payment. An alternate option is financing a lump-sum PMI premium into your loan, both sidestepping the closing payment and the increase to your monthly house payment.
The nice thing is that you don’t have to do the shopping for Private Mortgage Insurance on your own. Most lenders deal with multiple PMI companies and will be happy to share that information with you. The only time this can become an issue is if a PMI company turns down a loan because the borrower is viewed as a risk.
PMI is Temporary, Unless You’re High Risk
Being a high-risk borrower can also factor in even after you obtain PMI for your mortgage. Typically, PMI is automatically terminated once you reach 22% equity in your home (based on the original property value). But if you’re a high-risk borrower, you may need to maintain your Private Mortgage Insurance for the life of the loan.
We Can Help You Out
If you want to learn more about Private Mortgage Insurance, check out our blog post that goes into greater detail about PMI. Or contact us directly and one of our team members can answer any questions you have about this, or any other home loan topic.