Private Mortgage Insurance (PMI) is a type of insurance required by lenders when borrowers take out a conventional loan with a down payment of less than 20%. It protects the lender in case the borrower defaults on the loan. Understanding PMI is important for homebuyers to grasp the additional costs involved in financing a home.
What is Private Mortgage Insurance?
PMI is an insurance policy that the borrower pays for, which protects the lender rather than the borrower. It is typically required when the down payment is below 20% of the home's purchase price. The cost of PMI varies based on the loan amount and borrower creditworthiness.
How PMI Works
Once the borrower has paid down the mortgage to 20% of the home's value, they can usually request to cancel PMI. Some lenders automatically cancel PMI once the loan balance reaches 78% of the original value. PMI payments are added to the monthly mortgage bill until the cancellation criteria are met.
Costs Associated with PMI
The cost of PMI typically ranges from 0.3% to 1.5% of the original loan amount annually. This amount is divided into monthly payments. Borrowers should consider PMI as part of their overall housing costs when budgeting for a home purchase.
- Initial PMI premium (if applicable)
- Monthly PMI payments
- Cancellation fees (if any)