What is PMI? All You Need to Know About Private Mortgage Insurance

Private mortgage insurance, or PMI, is one of the most misunderstood parts of getting a home loan, especially for first-time buyers. If you’ve ever wondered, “What is PMI and why do I have to pay it?” you’re not alone.

PMI can affect both your upfront costs and your monthly mortgage payment, so understanding it is an important step in planning your home purchase. In this article, we’ll explain what private mortgage insurance is, why it exists, when it’s required, and how you can remove it down the road.

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What is PMI? Defining Private Mortgage Insurance

Private mortgage insurance is a type of insurance that protects the lender, not the borrower, in the event that the borrower fails to repay the loan. It’s commonly required on conventional loans when a buyer makes a smaller down payment, typically below 20%.

PMI reduces the lender’s risk by allowing buyers to purchase a home with less money upfront. However, it’s essential to note that it differs from homeowners’ insurance; it doesn’t protect your property or belongings. Instead, it safeguards the lender’s investment in your mortgage.

Why Do Lenders Require PMI?

Lenders consider loans with smaller down payments to be higher risk. If a borrower stops making payments and the home’s value declines, the lender may incur a loss when selling the property. That’s where private mortgage insurance comes in; it serves as a financial safeguard for the lender.

For conventional loans, PMI is typically required when the borrower contributes less than 20% of the home’s purchase price at closing. Government-backed loans, such as FHA and USDA, utilize different forms of insurance, which serve a similar purpose: protecting the lender in the event of default.

Who Needs to Pay PMI?

After asking “What is PMI?” now you might be wondering who needs PMI. If you’re getting a conventional mortgage and making a low down payment, chances are you’ll need to pay it. This is especially common for:

  • First-time buyers with limited savings

  • Buyers moving up to a larger home before building enough equity

  • Anyone choosing to put less money down to keep cash available

There are exceptions. Some lenders offer special programs that waive PMI for highly qualified borrowers or individuals in select professions. And if you’re eligible for a VA loan, you can avoid it altogether.

How Does PMI Work? Costs, Types, and Payment Methods

Now that you know what private mortgage insurance is, let’s look at what it means for your budget. Costs vary depending on several factors, and there are different ways to pay for it depending on your loan structure and preferences.

How Much Does PMI Cost?

PMI typically costs between 0.2% and 2% of your original loan amount per year. On a $300,000 mortgage, that could mean anywhere from $600 to $6,000 annually.

Several factors impact your PMI rate:

  • Credit score: Higher scores typically result in lower interest rates.

  • Down payment: The lower your down payment, the higher your rate.

  • Loan type: Fixed-rate loans can have lower PMI than adjustable-rate mortgages.

  • Loan size: Larger loans result in higher payments.

Different Types of Private Mortgage Insurance

Lenders offer several types of PMI. It’s important to consult with your lender about the available options, as the structure you choose will affect your monthly payment, upfront costs, and overall interest. Here are four different types of private mortgage insurance borrowers encounter.

1. Borrower-Paid

  • The most common type.

  • You pay monthly until you meet the requirements to cancel it.

  • Easier to drop once you’ve built enough equity.

2. Lender-Paid

  • The lender pays the insurance, but charges you a higher interest rate.

  • No additional monthly payment, but you might pay more over time.

3. Single-Premium

  • You pay the full cost upfront at closing.

  • No monthly payment, but you risk losing the payment if you sell or refinance soon.

4. Split-Premium

  • Combining a smaller upfront payment and lower monthly payments.

  • Good for buyers with limited cash or a tight monthly budget.

How Is Private Mortgage Insurance Paid?

Payment of your private mortgage insurance can happen in several ways, depending on the type of insurance and what your lender offers:

  • Monthly: Added to your mortgage payment, this is the most common.

  • Upfront: Paid in a lump sum at closing.

  • Split: A smaller upfront payment plus a lower monthly amount.

Your lender will walk you through your options before closing. Be sure to ask questions and consider how each choice fits with your financial goals.

Removing PMI: Options and Requirements

The good news: Private mortgage insurance doesn’t have to last forever. Once you build enough equity, you can get rid of it and lower your monthly bill. Here’s how:

Requesting cancellation: You can ask your lender to remove PMI once your loan reaches 80% loan-to-value (LTV). You’ll typically need to:

  • Be current on your payments.

  • Show a good payment history.

  • Provide proof of home value (such as an appraisal) if requested.

Automatic removal: Under federal law (the Homeowner’s Protection Act), your lender must cancel PMI once your loan balance reaches 78% of the original home value, assuming you’ve made on-time payments.

Refinancing to eliminate PMI: If your home has increased in value, or you’ve made significant extra payments, you might qualify to refinance into a new loan without the mortgage insurance. This option can help you eliminate the insurance faster, but be sure to weigh the refinancing costs against the potential savings.

Frequently Asked Questions and Common Myths

Does PMI protect me if I lose my job or get sick? No, it only protects the lender if you stop making payments.

Can I avoid PMI by taking out two loans? Some buyers use a “piggyback loan” (an 80/10/10 loan), but this can be more expensive or risky.

Is PMI tax-deductible? The IRS has changed these rules several times. Check the latest tax laws or ask your accountant.

Will I need PMI forever? No, once you reach enough equity in your home (usually 20%), the insurance can be removed or will drop off automatically.

Do all loans require PMI? Only conventional loans with less than 20% down require PMI. FHA loans require different types of insurance, while VA loans typically require none.

Still Wondering “What Is PMI?” Mortgage 1 Can Help

Understanding what private mortgage insurance is and how it fits into your mortgage empowers you to make informed decisions about your home purchase or refinance. With the right strategy, you can remove PMI and reduce your monthly payments over time.

At Mortgage 1, we’re committed to helping you understand all the costs and benefits tied to your loan. Our team is here to guide you through your options, whether you’re preparing to buy a home or exploring ways to drop PMI on your current loan.

If you’re ready to take the next step or just have questions, contact My Gates Team today at 810-335-2102. We’ll help you find the right path forward with confidence.

Heidi Gates