Private Mortgage insurance (PMI) Explained

If you purchase your home with a down-payment less than 20% and use conventional financing, your lender may require you to purchase Private Mortgage Insurance (PMI).

PMI protects the lender (not you) if you stop making your mortgage payments. PMI does not protect you from foreclosure if you fall behind on payments.

How do I pay for PMI?

The most common way to pay for PMI is a monthly premium.

• The premium is added to your mortgage payment.

Sometimes you pay for PMI with a one-time up-front premium paid at closing.

• If you make an up-front payment and then move or refinance, you might not be entitled to a refund of the premium.

How does PMI compare to other parts of my loan offer?

Interest rate

Lenders sometimes offer conventional loans with smaller down payments that do not require PMI. As a tradeoff, you usually pay a higher interest rate for these loans. Paying a higher interest rate can be more or less expensive than the PMI, depending on a number of factors, including how long you plan to stay in the home.

Taxes

You might want to ask a tax advisor whether paying more in interest or paying PMI might affect your taxes differently.

Other loan programs

Borrowers making a low down payment might want to consider other types of loans, such as an FHA loan. Other types of loans may be more or less expensive than a conventional loan with PMI, depending on your credit score, your down payment amount, the lender, and general market conditions.

The Good news

• You can remove PMI with a Conventional Loan - It’s not permanent! Once you have 20% equity in your home, you can connect with the bank to remove the PMI.

• PMI allows you to use less than 20% for a down-payment, therefore increasing your purchasing power.

• PMI helps reduce your cash investment so you can use money for other things, such as making improvements to your home.