
If you are a prospective home buyer, there is a good chance that you have at least heard of the term Private Mortgage Insurance, or PMI. However, this does not mean that you have a full understanding of this term.
Fortunately, we have created this article to give you some insights into what PMI is. After we give a brief definition, we’ll cover more about how PMI works and what to expect if it becomes a part of your mortgage deal.
Definition of PMI
As noted in the introduction, the term PMI stands for private mortgage insurance. This type of insurance is typically required in instances in which a prospective home buyer takes out a conventional loan. Usually, the down payment for that loan will be less than 20% of the total value for PMI to be applicable.
Ultimately, PMI is a tool that helps protect the lender rather than the borrower. PMI is in place to ensure the lender remains protected in cases where the borrower fails to pay back their loan. However, there are advantages to the borrower as well.
PMI can help a borrower qualify for a loan if they would otherwise be rejected. As such, PMI can benefit borrowers by giving them more borrowing opportunities while providing protection for lenders who might offer a loan if PMI were not in place.
Who is Responsible for Paying PMI?
Since the purpose of PMI is to protect borrowers from potentially unqualified borrowers, it is the borrower’s responsibility to cover the PMI’s costs. As noted above, this form of insurance payment allows borrowers to qualify for loans that they would otherwise not receive. As the section below will show, there are multiple ways that a borrower can facilitate PMI payments.
Types of PMI Payment Options
PMI is not a one-size-fits-all endeavor. Instead, there are at least three types of PMI that you should know about. The list below explains these main types of PMI:
- Upfront PMI: This type of insurance involves a one-time payment at the beginning of a loan agreement. Typically, no follow-up payments are required.
- Monthly PMI: In this situation, the insurance payment will be split into monthly installments. Borrowers will include the PMI payment in their regular monthly mortgage payment.
- Upfront and Monthly PMI: This third type of PMI combines the first two. Borrowers will need to pay at the beginning of a loan agreement, and each month they pay their mortgage.
Do PMI Payments End?
If you are thinking of taking out a mortgage to buy a home with less than 20% down, you may be wondering if there is any end to your PMI payments. The good news is that there are some defined parameters around when you can stop making these payments.
Generally, when you have built 20% or more equity in your home, you can stop your PMI payments. Similarly, if the principal balance on your loan reaches 78% of the original value, it is likely that your PMI payments will cease.
Advantages of Choosing PMI
At this point, you may be wondering if PMI is worth it for you. After all, the cost of a mortgage itself is often high enough to stress a person’s budget. However, you should know that opting for a loan with PMI comes with one major advantage for the borrower.
PMI is perfect for those who are unable to save more than a 20% down payment on the appraisal value of the home they wish to purchase. Rather than waiting until you have enough money to make this large of a down payment, you can choose a loan with PMI to make your home purchase more quickly.
Imagine a scenario in which you find the home of your dreams, but you cannot afford a 20% down payment. In such scenarios, choosing PMI allows you to buy your dream house without the down payment a lender would typically request. Simultaneously, the PMI makes the lender feel more comfortable giving you a loan, knowing that they have some protection in the form of PMI.
Similarly, PMI is a perfect option if you wish to refinance your home but have less than 20% equity. In such cases, PMI allows for refinancing even though your total equity is relatively low.
Factors that Affect PMI
If you are interested in taking out a loan with PMI, you should have an understanding of the factors that affect the level of PMI payments you’ll need to make. While we have alluded to a few in this article, the list below gives a clear indication of the factors that influence this payment amount:
- Total price of the loan
- Total down payment amount
- Your current credit score at the time of opening or refinancing a loan
- The type of mortgage
- The terms set by the lender
Clearly, the total amount you’ll need to pay for PMI can vary greatly depending on the scenario. The best way to know what you’ll need to pay for this form of insurance is to have a discussion with a lender in your area.
Other Pricing Factors to Consider When Taking a Mortgage
PMI is important to understand. However, there are plenty of other payment factors that you should consider if you are a borrower looking for a mortgage. Below is a list of a few of the main pricing factors to keep in mind as you shop for a mortgage:
- The mortgage interest rate
- Taxes on the property
- Total down payment
- Specifics set by each individual lender
There’s a lot to consider when opening a mortgage. Only by factoring all of the above and more can you get an accurate idea of how much purchasing a home with a mortgage will cost you.
Find the Home You Have Been Looking For
If knowing the details of PMI is all that stands between you and purchasing a home, then it is time for you to get in contact with a real estate expert. For anyone in the Columbus area, The Goldsmith Team is the perfect choice for your home-buying adventure. Reach out today to see our listings and learn more about how we can guide you through every step of the process.