PMI (Private Mortgage Insurance) Explained
Every industry has its own library of jargon and acronyms that few customers truly understand. And when it comes to mortgages and real estate, it is no different. But knowing, and understanding, common terms can be the difference between a good or bad experience with buying and selling a home. Which brings us to this post’s topic, PMI. It’s one of the more common terms when it comes to buying a home, but one that can still lead to confusion. So, we’re here to clear things up.
Private mortgage insurance, PMI for short, is a common type of insurance for conventional, FHA and other types of home loans. PMI is usually required when a buyer isn’t able to make a down payment of 20% or more. PMI is not insurance to protect the buyer, it protects the lender in case a buyer stops making payments on the mortgage.
Who Pays for It?
PMI is paid for by the buyer or the lender, dependent upon the mortgage insurance premium option selected. The monthly borrower paid premium option included in their mortgage payment is the most common. Luckily, PMI is not a hidden fee so, buyers rarely experience shellshock from it. For buyers not making a 20% down payment, the PMI premium is calculated in their mortgage payment estimations. In some cases, a buyer can make a one-time, upfront premium payment for their PMI. The specifics to PMI change based on your loan type and it is important that you have open conversations with your mortgage loan originator.
You have PMI, Now What?
Oftentimes people understand they have PMI, but forget it is a part of their monthly payment. Take note, and make a calendar event for when you have reached 20% in home equity to make sure your mortgage company drops your PMI from your bill. Additionally, if you find yourself with extra cash from a bonus or other activity, consider whether or not it makes sense to apply it to your mortgage. Are you close to your 20%? Use the extra money to pay more toward your principal balance and watch your PMI fall to the wayside.
The calculation of the 20% equity threshold for removal of PMI can be based on the original value at closing (automatic termination) or current value of the home (borrower requested termination). If the current value calculation is desired, work with your lender to determine the valuation method for that determination. This may require an independent appraisal to be completed at your cost.
In all cases, contact your lender in advance to understand the steps necessary to request PMI removal.
We wish we had a clever rhyme or song to help remember what PMI stands for but, it’s really pretty simple. Private mortgage insurance is a term you’ll hear anytime you’re buying or selling a home. And now you should have a pretty good handle on how it works and who it’s for.
If you ever have any questions about PMI or anything mortgage related, our Guardian Loan Professionals are ready to answer your questions.