Mortgage Basics
Private Mortgage Insurance

Private Mortgage Insurance (PMI) is a type of insurance that protects lenders in case a borrower defaults on their mortgage. It is typically required when the borrower is unable to provide a 20% down payment. PMI ensures that the lender will be reimbursed if the borrower defaults and the property goes into foreclosure. This insurance allows borrowers to secure financing even with a smaller down payment, making homeownership more accessible. PMI does not benefit the borrower directly, but it enables them to purchase a home without needing to save for a larger down payment.

PMI works by covering a portion of the lender’s risk if a borrower defaults on their loan. When a borrower makes a down payment of less than 20%, the lender considers the loan riskier, and PMI provides protection. The insurance premium is added to the borrower’s monthly mortgage payment. The amount of PMI depends on several factors, such as the size of the down payment, the loan amount, and the type of loan. While PMI doesn’t benefit the borrower directly, it allows them to get approved for a mortgage despite a lower down payment.

Yes, obtaining PMI could help you qualify for a larger loan. If you're unable to make a 20% down payment but still want to purchase a home in a higher price range, PMI could be a useful tool. By paying PMI, lenders are more willing to approve higher loan amounts because the insurance reduces their risk. This gives you the flexibility to borrow more than you would be able to without PMI, as the lender is protected if the borrower defaults on the loan.

The cost of PMI varies depending on the size of the loan, the down payment, the loan type, and credit score. Generally, PMI costs between 0.3% and 1.5% of the original loan amount per year. For example, if your loan is $200,000, PMI could cost between $600 and $3,000 annually. Typically, the higher your loan-to-value (LTV) ratio (i.e., the smaller your down payment), the higher your PMI premium will be.

Private mortgage insurance is generally paid monthly as part of your mortgage payment. The premium is added to your monthly mortgage bill, along with the principal, interest, taxes, and insurance (PITI). In some cases, PMI can be paid upfront as a lump sum at closing, or it can be split into a combination of an upfront premium and monthly installments. The specific payment structure will depend on your lender and the terms of your mortgage. If you pay PMI upfront, your monthly payments may be lower, but your initial costs at closing will be higher.  

Typically, the lender will arrange for PMI when you take out a mortgage that requires it. The lender will assess whether PMI is needed based on your down payment and the loan amount. If PMI is necessary, the lender will select a PMI company and include the cost of the insurance in your monthly mortgage payments. Buyers don’t need to apply for PMI directly but should be aware of PMI requirements when applying for a loan. It’s also a good idea to compare PMI rates from different lenders to ensure you get the best deal.

PMI has been around for several decades and became more common after World War II, when government-backed programs like the FHA (Federal Housing Administration) helped increase homeownership opportunities. As home prices increased and down payments became less common, private insurers began offering PMI to help protect lenders and make home loans more accessible. Over time, PMI has evolved, with different types of PMI becoming available to suit different loan types and borrower needs. It has played a significant role in expanding homeownership opportunities by enabling borrowers to purchase homes with less upfront cost.

The process of canceling PMI depends on your loan terms and your lender’s policies. The Homeowners Protection Act (HPA) mandates that PMI be canceled automatically once the borrower reaches 22% equity in the home, based on the original home value. However, borrowers can request cancellation of PMI when they reach 20% equity. To cancel PMI, you may need to request a home appraisal to verify the current value of the property. If your home has appreciated or you’ve paid down enough of your loan, you may be eligible for PMI cancellation. It’s important to review your PMI cancellation rights with your lender to ensure you’re not overpaying.  

The Fair Credit Reporting Act (FCRA) is a law that ensures the accuracy and fairness of consumer credit information. PMI companies and lenders rely on credit reports to determine the borrower’s risk level and PMI premium. The FCRA ensures that any information used to determine PMI eligibility, including credit reports, is accurate, up-to-date, and used appropriately. If there are any errors on your credit report, they could impact the cost of PMI. It’s a good idea to review your credit report before applying for a mortgage to ensure that you’re getting the best possible rate on PMI.