What Is Private Mortgage Insurance (PMI)?

Private mortgage insurance
Private mortgage insurance may allow a quicker path to homeownership.

For most Americans, buying a home is the single biggest investment of your life. Of course, the process of buying a home can seem overwhelming to some. Between the down payment, closing costs, and all the other expenses, things can get a little. One term you might encounter is private mortgage insurance, or PMI. But what exactly is it, and why might you need it? We explain below.

PMI: What is it?

Private mortgage insurance is a type of insurance that protects the lender, not the borrower, in case you default on your mortgage (meaning you stop making payments). Lenders typically require PMI if your down payment is less than 20% of the home’s value. This is because a lower down payment means a higher loan-to-value (LTV) ratio, which for the lender translates to a higher risk of loss if you can’t keep up with your payments.

Why do I need PMI?

PMI isn’t mandatory, but it’s a way to qualify for a conventional mortgage with a lower down payment. Without PMI, lenders might be hesitant to approve your loan if they feel there’s a bigger chance they won’t recoup their investment if things go south. PMI acts as a safety net for them.

How PMI works

PMI is typically added to your monthly mortgage payment. The cost can vary depending on several factors, including:

  • The size of your down payment
  • The loan amount
  • Your credit score
  • The type of loan (fixed-rate or adjustable-rate)

Generally, the higher your down payment and credit score, the lower your PMI payment will be.

Summary

The good news is that PMI isn’t a lifelong burden. Once you reach 20% equity in your home (usually through a combination of making payments and your home’s value appreciating), you can typically request PMI cancellation. Many lenders even have it automatically removed at a certain point, often around 22% equity.

If you’d rather avoid PMI, there are a couple of options:

  • Save Up for a Larger Down Payment: This is the most straightforward approach. The higher your down payment, the closer you get to that 20% mark and the sooner you can ditch PMI.
  • Explore Other Loan Options: Consider government-backed loans like FHA loans, which may allow for lower down payments without PMI. However, these loans often come with other fees.

All in all, PMI can be a helpful tool for home buyers that do not have enough money saved for a 20% down payment on a home. Ultimately, it allows buyers to potentially become homeowners sooner.

Are you looking to buy or sell real estate in the South Florida area? We can help! Contact Natasha at Live South Florida Realty, Inc. today! Also, be sure to download the free Florida Home Search for your smartphone or tablet.

By natasha moore

REALTOR® with Live South Florida Realty, Inc.