The Truth About PMI, Private Mortgage Insurance

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When shopping for a mortgage there is more to do than just compare mortgage rate quotes. Private mortgage insurance or commonly called “PMI” is insurance provided by a private company helping to protect the mortgage lender against mortgage default. Generally, this insurance is required by the lender when the down payment is less than 20% of the properly value. The lender requires the borrower to pay the insurance premiums.

Private mortgage insurance can be avoided. If you are looking to do a 100% financing loan, one option is to do an 80/20 combo loan. This allows you to avoid mortgage insurance and will provide a lower payment than if you were to pay the private mortgage insurance.

Some lenders now have loan programs where the lender pays the PMI and the rate is only slightly higher than it would be if the loan was under 80% of the value of the home.

One of the most frequently misunderstood aspects of mortgaging a home, especially for first-time buyers, is Private Mortgage Insurance (PMI). The most common misconception is that PMI is a mortgage life insurance policy whereby the mortgage would be paid off should the borrower die. It is not.
Instead, PMI is an insurance that most lenders require of all borrowers who put less than 20% down. It’s purpose is to protect the lender against losses should the borrower default.

Virtually all conventional mortgages with less than a 20% downpayment will dictate the inclusion of PMI. FHA mortgages, which are insured by the Federal Governement, require a different type of insurance with different coverages. The cost of PMI will depend on a number of factors, including the insurance carrier and the size of the loan, but monthly payments for the insurance will generally fall into the $25 – $100 range for median priced homes.