What is private mortgage insurance (PMI)? PMI is generally required to qualify for a mortgage or refinancing on a first or second home when the borrower has less than a 20% down payment or less than 20% equity in their property. It is insurance to protect the lender in case the borrower defaults on mortgage payments. The borrower pays the premiums and the lender is the beneficiary.
The PMI premium (cost) may be paid either in a one-time payment at closing, or in installments added to the borrower’s monthly mortgage payment. A number of factors should be considered to determine which payment method is best for you, such as when you plan on selling your home or if you expect to refinance in the future.
One advantage of making monthly payments is that they are not necessarily required for the entire term of the loan. The borrower may notify the lender when the loan-to-value ratio (the loan amount divided by the property’s value) falls to 80%. PMI payments automatically end when the borrower is current on all loan payments and the loan-to-value ratio falls below 78%. Be sure you ask your lender if they require certain documentation prior to the cancellation of the monthly PMI payments.
The cost of the premium for PMI varies depending on the loan-to-value. Generally, the lower the loan-to-value, the lower the premium will be. A borrower with greater equity in the property, such as a borrower who makes a 10% down payment, will have a lower premium than a borrower who makes a 5% down payment.
Another factor affecting the PMI premium is the borrower’s credit rating. As with other loan features, such as the interest rate, a better credit score can mean a lower premium. Borrowers are encouraged to check their credit rating periodically and to take steps to improve it, if needed, before applying for a loan.
It’s a good idea to get all the facts from your lender before deciding if PMI is right for you. Here are some tips to get you started.
- Do your homework. Determine the purchase price you can afford and the amount of the down payment you can make.
- Ask your lender, before applying for the loan, what the premium for PMI will be. Find out how much you will save on the PMI premium if you increase your down payment. A similar analysis can be made if you are refinancing – – inquire as to the PMI premium savings if you reduce your loan amount.
- Compare the cost of paying the PMI premium in a one-time payment at closing to paying monthly installments. Consider how long you anticipate owning the home. The shorter the period of ownership, the more attractive monthly payments may be.
- If you opt to pay monthly PMI premiums, verify the point at which the payments will no longer be required based on the property’s future loan-to-value ratio.
The U.S. Federal Trade Commission has information about PMI on its website consumer.ftc.gov. For more information or to speak with a Lakeland Bank representative to learn more about mortgages, please contact us.