Private Mortgage Insurance (PMI) is a type of insurance that most lenders require from homebuyers who take out conventional loans with a down payment of less than 20% of the home's purchase price. PMI protects the lender in the event that the borrower defaults on the loan.
Key Aspects of PMI:
Cost of PMI: The cost typically ranges from 0.3% to 1.5% of the original loan amount per year. This cost is added to your monthly mortgage payment.
Factors Influencing PMI Rates: The rate can be influenced by the loan-to-value ratio (LTV), the type of loan, the amount of coverage required by the lender, and the borrower’s credit score. A higher credit score generally results in a lower PMI rate.
Eliminating PMI: Once the borrower’s equity in the home reaches 20%, PMI can be eliminated. Homeowners can request the cancellation of PMI once their principal balance reaches 80% of the home's original value. By law, lenders must automatically remove PMI when the LTV reaches 78%, assuming payments are current.
Policy Types: PMI may be structured in different ways such as borrower-paid mortgage insurance (BPMI), lender-paid mortgage insurance (LPMI), single-premium mortgage insurance, or split-premium mortgage insurance.
Tax Deductions: Currently, PMI premiums may be deductible for certain taxpayers, subject to income limitations and changes in tax law.
Considerations for Borrowers:
- Financial Impact: Consider how PMI affects your overall homeownership costs, comparing potential costs versus savings.
- Loan Structuring: Explore different loan scenarios to determine whether paying PMI or making a larger down payment is more beneficial for your financial situation.
Understanding PMI helps borrowers make informed decisions about their mortgage options and evaluate the short- and long-term financial implications.