PMI protects the lender, not the borrower. Because there's less of a down payment on this type of loan, the lender's risk is higher; to offset some of that risk, they require a specific type of insurance – PMI. If you stop making loan payments, PMI won't save you from foreclosure.
PMI is insurance for the mortgage lender's benefit, not yours. The coverage will pay a portion of the balance due to the mortgage lender in the event you default on the home loan. Usually, you pay for PMI monthly as part of your mortgage payment.
PMI is usually paid monthly as part of the overall mortgage payment to the lender, but sometimes it is paid as a one-time, up-front premium at closing. PMI isn't permanent—it can be dropped once a borrower pays down enough of the mortgage's principal. PMI discontinuation rules only apply to conventional loans.
It insures the lender against loss caused by borrowers failing to make loan payments. Make no mistake: If you fall behind on your mortgage payments, PMI does not protect you and you can still lose your home through foreclosure. PMI can help you qualify for a loan that you might not otherwise be able to get.
The Bottom Line. PMI is expensive. Unless you think you can get 20% equity in the home within a couple of years, it probably makes sense to wait until you can make a larger down payment or consider a less expensive home, which will make a 20% down payment more affordable.
PMI is an avoidable extra cost associated with buying a home. That said, sometimes paying PMI is the right move; it can help you get into a home that would otherwise be out of reach.
Learning how to avoid PMI can significantly reduce your monthly mortgage expenses. And like all insurance policies, the cost of PMI is risk-based. Making a smaller down payment or getting an adjustable-rate mortgage, for example, puts your lender at greater risk, so you should expect your PMI costs to run higher.
If you buy a $300,000 home, you could be paying somewhere between $600 – $6,000 per year in mortgage insurance. This cost is broken into monthly installments to make it more affordable. In this example, you're likely looking at paying $50 – $500 per month.
You'll pay PMI until you've reached 20 percent equity in your home, or an 80 percent loan-to-value (LTV) ratio on your mortgage.
When PMI is canceled, the lender has 45 days to refund applicable premiums. That said, do you get PMI back when you sell your house? It's a reasonable question considering the new borrower is on the hook for mortgage insurance moving forward. Unfortunately for you, the seller, the premiums you paid won't be refunded.
It's common for homeowners to mistakenly think that PMI will cover their mortgage payments if they lose their job, become disabled, or die. But this belief isn't correct. PMI is designed to protect the lender, not the homeowner.
Determine whether you're able to afford a 20% down payment on a home. If you are, there's no need to worry about PMI! If you're not putting down at least 20%, see if you qualify for different mortgage loans that don't require PMI, such as a VA loan from Navy Federal.
If you can easily afford it, you should probably put 20% down on a house. You'll avoid paying for private mortgage insurance, and you'll have a lower loan amount and smaller monthly payments to worry about. You could save a lot of money in the long run.
You pay for PMI as part of your monthly escrow payment. That means in addition to paying your property taxes and homeowner's insurance into your escrow account, you also pay your monthly PMI fee into the escrow account as well.
A borrower can request PMI be canceled when they've amassed 20 percent equity in the home and lived in it for several years. There are other ways to get rid of PMI ahead of schedule: refinancing, getting the home re-appraised (to see if it's increased in value), and paying down your principal faster.
What Does a High PMI Reading Indicate? The Purchasing Managers' Index reading can range between 0 and 100. If the index reading is higher than 50, then it indicates an economic expansion. This means that the closer the reading is to 100, the higher the degree of positive economic growth.
Depending on how much you put down, PMI can cost anywhere from 0.19–1.86% of your loan balance per year. It protects your lender—not you—in case you stop making payments on your loan. So when does PMI go away? As a general rule, you can get PMI removed once you have 20% equity in your home.
The cons to PMI are that it remains with a mortgage until the principal balance falls to 80% below the value of the home. It may take years to reach this threshold and, until then, you'll continue to pay it.
PMI typically costs anywhere from 0.5% to 1% of your total mortgage loan amount. If you borrowed $350,000, that would mean your PMI payments could add as much as $292 to your monthly cost. This added expense can affect your debt-to-income ratio and make it harder to qualify for a mortgage loan.
PMI is something you pay for but it actually protects the lender, not you. A 20% down payment has traditionally been the standard because if a borrower defaults and the lender must foreclose on the property, that 20% down payment will help the lender pay for the costs of repairing and selling the home.
Federal law allows you to submit a written request for PMI removal, which would start when the principal balance of your loan is scheduled to reach 80% of the original value of the property. Other qualifications for PMI cancellation include being current on your mortgage payments and having a good payment history.
Like principal and interest, private mortgage insurance premiums generally don't change after your loan closes. So you can eliminate that as well. That leaves home insurance premiums. Providers do increase them from time to time, however there are steps you can take to reduce this cost.
You can typically request PMI be removed once you've reached 20% equity in your home in many cases as long as the value is verified. You will also need to be current on your payments.