What Is PMI?

What is PMI?

Lenders typically require a down payment of at least 20 percent of the purchase price. Private Mortgage Insurance makes it possible for a homebuyer to obtain a mortgage with a down payment as low as 5% and for low-to-moderate income homebuyers as low as 3%. Private mortgage insurance may be also required when buying a second home or refinancing an existing mortgage with cash out. Mortgage insurance protects the mortgage lender against financial loss if a borrower defaults.

Low down payment mortgages are becoming more and more popular. Mortgage insurance allows borrowers to purchase a more expensive home than they might otherwise be able to afford. With lower down payment you retain more for home furnishings, or buying a car or other investments.

Typically, a portion of the mortgage insurance premium (depending on the premium plan chosen) is paid up front at closing, and the rest is paid as part of the monthly mortgage payment. Under an annual plan, a borrower pays the first-year premium at closing. Monthly plan allows homebuyers to pay 1 or 2 month's mortgage insurance premium at closing. With single premium plan a borrower need to pay a one-time single premium. Some mortgage insurance plans adds the amount of the mortgage insurance premium to the loan amount. In that case, borrowers make no mortgage insurance payment at closing and the first insurance payment is made with the first mortgage principal and interest payment.

The mortgage insurance premium is based on loan to value ratio, type of loan, and amount of coverage required by the lender. The good faith estimate of closing costs provides the estimated premium and monthly cost for the private mortgage insurance coverage.

It may be possible to cancel private mortgage insurance at some point, such as when your loan balance is reduced to a certain amount - below 75% to 80% of the property value. The law in certain states requires that mortgage insurance be cancelled under some circumstances. But because of the wide variation in lender, investor and state requirements, it is necessary to find out the specific requirements for cancellation before you commit to paying for mortgage insurance.

Mortgage insurance should not be confused with mortgage life insurance, which is designed to pay off a mortgage in the event of the borrower's death.