In the world of real estate, the initials PMI refers to Private Mortgage Insurance. This is a type of insurance that some home buyers are required to obtain. It protects a lender in the event that a borrower defaults on a loan. Because PMI protects lenders, it may also allow a home buyer to purchase a new home with a smaller down payment.
How PMI Works
The average home buyer must take out a mortgage to purchase a new home, but a down payment also usually has to be made. If the down payment is less than 20 percent of the purchase price of the home, then a typical lender will require that the borrower of a mortgage also obtains PMI.
The borrower will be responsible for paying the insurance premiums, but the insurance actually protects the lender. If the borrower stops making mortgage payments, the lender does not lose the money.
If you are buying a home, the main benefit of PMI is that it allows you to make the purchase with a down payment as low as three percent. Without PMI, you would not be able to obtain a loan with a down payment that low. Because lenders are protected by PMI, they are more willing to take a risk. This arrangement allows many people to become homeowners much sooner than they otherwise could afford.
What Does It Cost?
The cost of PMI can vary widely, but premiums are generally between one-half and one percent of the loan balance per year. Someone with a $200,000 balance who made a $10,000 down payment can expect to pay around $85 per month. A person’s credit score is not a factor. Two people with loans and down payments of similar amounts will pay the same amount for the same coverage, regardless of their credit scores.
When Can PMI Be Canceled?
As long as you have a good payment history, you can cancel your PMI as soon as your loan has been paid down to 80 percent of the original purchase price of the home. To qualify, your mortgage payment must not have been more than 30 days late within the last year or more than 60 days late within the last two years. If you are current on your loan, PMI coverage must usually be terminated automatically once the loan has been paid down to 78 percent. If your loan is considered high risk, automatic termination may not occur until the loan is paid down to 77 percent.
