Buying a house? You'll want to get the facts about Private Mortgage Insurance (PMI).
Whenever you're considering buying a house, it's best to go into the situation as prepared as you can be. An experienced real estate agent helps, but the knowledge you bring to the table is also essential.
PMI — private mortgage insurance — is one area where buyers often face confusion.
- What is PMI?
PMI is a form of insurance you may be required to pay for if you have a conventional home loan.
- Who Benefits from PMI?
The home buyer pays but gets none of the benefits. PMI is exclusively intended to protect the mortgage lender in the event that a buyer defaults on loan payments. It is not an insurance policy on your personal property or belongings.
- How Much is PMI?
PMI usually runs from 0.3% to 1.5% of the original home loan amount annually.
- When Do I Need PMI?
If you have a conventional commercial mortgage — not one backed by any government agency — then you probably need PMI. In federal home loan programs, the loans are guaranteed by the government. PMI isn't required in these situations, but the total cost of the loan may be higher.
If you are buying a house with a down payment of 20% or more, then you may not need PMI, either. Whether PMI is required and how much you are expected to maintain will depend on the standards of each lender. Requirements may differ depending on the loan's total value, too.
- Who Arranges for PMI?
Although you'll probably compare many lenders before deciding which one should finance your mortgage, you don't have to do any comparison shopping when it comes to PMI. Instead, it's the lender who determines the right PMI arrangement and selects the insurer.
- Who Receives PMI Payments?
Payments go into escrow and are paid to the insurer by the mortgage lender.
- How Do I Make PMI Payments?
Usually, PMI costs are rolled directly into your mortgage payment, and you pay them monthly. This ensures that it's impossible to accidentally overlook the PMI payment. As long as you are making mortgage payments on time, you are also up to date with your PMI.
However, there are alternative options. In some cases, you may make a single, upfront payment of the PMI premium. This is a convenient way to reduce the total cost of ownership. If you later decide to move or refinance, however, you might not be entitled to a refund of the premium.
Sometimes, you may be required to pay both an upfront premium and a monthly premium. Your lender should help you determine the best option for you. For example, increasing your down payment may make it possible for you to avoid the upfront payment requirement.
- Do I Need PMI During the Life of My Mortgage?
Homeowners who have continuously paid their mortgage premium for several years often have the option of canceling their PMI insurance. This option may kick in after five years, ten years, or longer. Ask your lender for details.
- How Does PMI Affect My Loan Eligibility?
Some level of PMI is required by many lenders, but not all. Electing to adopt an optional PMI policy can help you secure a loan that you might not otherwise qualify for. Plus, having PMI will usually lower your interest rate, which influences how quickly you can pay off your loan.
In most cases, there are several ways to improve your loan options: Adding to your down payment, pursuing government loan programs, and, yes, PMI. With personalized advice from your mortgage lender, you can make the right decision.