What is PMI and how does it fit into your mortgage?

The homebuying process might sometimes feel like a puzzle, full of pieces that come together gradually as the journey unfolds. Many of those puzzle pieces consist of terms and acronyms that may be new to you, which means you’ll likely have many questions for the experts helping you along the way.

One of those acronyms you’ll probably hear: PMI, otherwise known as private mortgage insurance.  Understanding PMI and how it impacts your full financial picture is important. Explore some common questions below so you can better understand how this piece fits into the bigger puzzle of your homebuying journey.

Private mortgage insurance (PMI) is part of the borrowing costs you typically pay to your lender for a conventional loan if your down payment is less than 20%. It’s required by lenders to protect themselves against potential losses that may come from a borrower defaulting on their loan.

It's important to note that PMI does not protect you as the borrower in the event you default on your loan or if your loan is foreclosed upon.

For your visibility, PMI will be listed on your loan estimates, quotes, disclosures, and mortgage statements throughout your homebuying journey.

Generally, PMI will be added as part of your monthly mortgage payment. You may also be able to pay for PMI in full during the closing process, so talk with your home mortgage consultant about your options if you wish to pursue this route.

The cost of PMI will vary depending on several factors including the loan amount and down payment. PMI will typically cost less if you put more money down and have a good credit score.

Typically, PMI will be automatically removed by your lender when your loan is first scheduled to reach a loan-to-value ratio (LTV) of 78%. You may be able to remove it sooner once you pay your loan down to 80% LTV. LTV is your loan balance divided by your home’s purchase price or value at the time your loan is closed, whichever is lower.

Additionally, if your home value increases after you get your loan, you may be able to request PMI cancellation at an earlier time. This will usually require a new appraisal of your home, which may incur extra costs on your part.

Options and requirements for PMI cancellation will vary depending on your specific loan, your lender can break down the information that applies to your loan.

One common question we hear from borrowers is if PMI is the same as MIP. The short answer is no—MIP and PMI are not the same. If you get an FHA loan, you will be required to pay mortgage insurance premiums (MIP) for the duration of your loan. This contrasts with PMI, which is normally required on conventional loans and can typically be removed.

Now that you know a bit about PMI, talk to your loan officer or home mortgage consultant if you have any questions during your homebuying journey.

Still looking for additional methods to help lower your homebuying costs? Explore more tips for budgeting while buying a home as you continue to survey your financial options.