There’s no hiding it- mortgages are tricky business. With so many moving parts involved, from down payments to interest rates, I could write a book on the subject.

But for purposes of keeping things simple today I’m going to stick to the topic of private mortgage insurance or PMI.

What is private mortgage insurance or PMI?

When you take out a mortgage or home loan to pay for a property, you are borrowing money from a lender to help finance your purchase. This loan will supplement your down payment (the money you pay upfront) and cover the rest of the property’s total sale price.

If you make a down payment of less than 20% of the home’s sale price, your lender will most likely require you to buy private mortgage insurance. The lower your down payment the more of a risk you are to your lender, so they’ll want to have a backup plan in case you default on your mortgage. If you are unable to make your monthly mortgage payments and your home ends up in foreclosure, PMI coverage will protect the lender from losing their investment.

How much does PMI coverage cost and how do I pay it?

Private mortgage insurance will cost anywhere between 0.3% to 1.20% of the principal, or the original sum of money borrowed from the lender. The rate will depend on factors such as your credit score and how much you’ve saved for a down payment. The general rule of thumb- the lower your down payment, the higher the cost of PMI.

How you pay for your coverage will depend on your specific policy and what you’ve agreed on with your lender. It’s pretty common to pay your PMI as a part of your total monthly mortgage payments to your lender along with other fees such as interest and property tax.

Other options include paying the entire cost of private mortgage insurance upfront at closing, or you may even be able to factor the cost into the amount of your loan.

Will I have to pay PMI for the entirety of my loan payments?

This type of mortgage insurance can get expensive, but it’s the price you pay for purchasing a home with little down, upfront. There is a plus though- you can cancel your PMI once you’ve met certain requirements.

In most cases, once you’ve paid back at least 20% equity in your home (equal to a 20% of the original value of your property), you can request that your lender remove the PMI. When you’ve paid back 22%, your lender is obligated to automatically cancel your PMI!

There are also other situations that allow you to remove these payments. For example, if mortgage rates drop, you may have the option of refinancing for mortgage to eliminate your PMI.

Interested in learning about other types of mortgage insurance? Contact me today and I’ll get you in touch with a trusted lender.