What is Private Mortgage Insurance (PMI)?
If you are not putting 20% down on your purchase, PMI will be a factor to consider when calculating your monthly housing budget. PMI is insurance that protects against losses in the rare case that a borrower is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property. There are a few ways you can choose to structure your PMI:
Monthly PMI: The premium is paid monthly to the bank, along with your principal and interest payment. The monthly premium varies for every borrower and is based on credit score loan amount and down payment amount.
If you choose this option, you would be eligible to drop your PMI once you reach one of following milestones:
- PMI will automatically terminate on the date the principal balance of your loan is first scheduled to reach 78% of the original value of the property, assuming you have been up to date on your payments and no other derogatory payment history has occurred.
- You gain 20% equity in your home through market increases or home improvements and/or the loan balance is paid down. Once you believe you have reached this point, you can pay for a new appraisal of your home. If the appraisal comes back at least 20% higher than the amount you still owe on your mortgage, then the servicer should cancel the PMI from your monthly mortgage payment pending your payment history has met the servicer’s terms.
Lender Paid PMI (LPMI): The lender pays the PMI for you on your closing day, but the interest rate offered is higher for the life of the loan, no matter how much equity you gain. The amount of the rate increase will vary for every borrower and is based on credit score loan amount and down payment amount. If you choose this option, you will not have a monthly PMI payment and the increase in the amount of interest you will pay each month is often less than a monthly PMI payment would be for the same loan.
Single Premium PMI (SPMI): The borrower pays for the PMI premium as a one-time lump sum payment. The cost of the premium payment varies for every borrower and is based on credit score loan amount and down payment amount. There are two Ways to pay for the premium.
- Financed single premium: The PMI premium is added to your loan amount and paid for over the full term of the loan as apart of your mortgage payment.
- Non-financed single premium: The PMI premium is paid at closing with the rest of the standard closing costs.