What is Private Mortgage Insurance (PMI) and When Do I Need It?

When applying for a mortgage, you may encounter the term "private mortgage insurance" (PMI). PMI is an insurance policy that protects the lender in case you default on your mortgage. It's typically required when you make a down payment of less than 20% of the home's purchase price.

When Do You Need PMI?

PMI is required when your loan-to-value (LTV) ratio is 80% or higher. The LTV ratio is the percentage of the home's purchase price that you're borrowing. For example, if you're buying a home for $200,000 and you make a down payment of $20,000, your LTV ratio would be 80% ($180,000 / $200,000).

PMI requirements can vary depending on your credit score. Borrowers with higher credit scores may be able to get PMI at a lower rate. Borrowers with lower credit scores may have to pay a higher PMI rate or may not be able to get PMI at all.

How Does PMI Work?

PMI premiums are typically calculated as a percentage of the original loan amount. The premium rate can vary depending on the LTV ratio and the borrower's credit score. PMI premiums are typically paid monthly, but some lenders may allow you to pay them upfront or as a single premium.

The cost of PMI can vary depending on the loan amount, the LTV ratio, and the borrower's credit score. For a $200,000 loan with an LTV ratio of 80% and a credit score of 720, the monthly PMI premium could be around $100.

Pros And Cons Of PMI

PMI can be a helpful tool for borrowers who want to buy a home with a smaller down payment. However, it's important to weigh the pros and cons of PMI before making a decision.

Advantages Of PMI

• Allows borrowers to purchase a home with a smaller down payment
• Helps borrowers build equity in their home faster
• Can improve a borrower's credit score

Disadvantages Of PMI

• Adds to the monthly mortgage payment
• Can increase the total cost of the loan
• May not be tax-deductible

Alternatives To PMI

There are a few alternatives to PMI that borrowers can consider.

• Higher down payment: Making a larger down payment can help you avoid PMI. The larger your down payment, the lower your LTV ratio will be, and the less likely you are to be required to pay PMI.
• Co-signer or guarantor: If you have a co-signer or guarantor with good credit, they may be able to help you get a mortgage without PMI.
• Home equity line of credit (HELOC): A HELOC is a line of credit that you can use to borrow money against the equity in your home. You can use a HELOC to make a down payment on a home, and then pay it back over time.
• Piggyback loan: A piggyback loan is a second mortgage that you can use to make up the difference between your down payment and the purchase price of the home.

PMI can be a helpful tool for borrowers who want to buy a home with a smaller down payment. However, it's important to weigh the pros and cons of PMI before making a decision. Borrowers should also consider alternatives to PMI, such as making a larger down payment or getting a co-signer or guarantor.

If you're considering PMI, it's important to talk to a mortgage lender to get personalized advice. A mortgage lender can help you determine if PMI is right for you and can help you find the best PMI rate.