When you’re purchasing a home, you may be required to have Private Mortgage Insurance, or PMI, if you’re putting less than 20% down.
Private Mortgage Insurance is insurance to protect lenders against a loss if a borrower defaults on the loan. PMI costs will likely result in a slight increase in your overall monthly payment, but can be a useful strategy for buying a house with a lower down payment. Typical rates are $55/month per $100,000 financed.
When you buy a home, the amount you put down will determine if you are required to have Private Mortgage Insurance. Your lender will look at the amount of your down payment compared to the sales price to determine your loan-to-value ratio.
For example, if you purchase a home for $200,000 and put $20,000 down, your loan to value ratio is 90%. Typically, if your loan-to-value ratio is more than 80% you’ll be required to obtain PMI.
Private Mortgage Insurance is built into your monthly mortgage payment. Your lender collects it, and then sends it to your mortgage insurer separately. Once your loan-to-value ratio hits 80%, you will no longer have to pay PMI. By law, lenders must automatically cancel PMI when the balance hits 78%.
RONALD: PMI is private mortgage insurance. If you do not put 20% down on the purchase of your home with some particular programs you’re going to have a mortgage insurance which is an insurance that covers the lender in case the borrower were to default on the mortgage.
CURT: So it’s basically insurance that the investor on the loan, which is normally Fannie Mae or Freddie Mac, places on the loan in case of default because it is higher loan-to-value loan. There’s more mortgage on the property than a normal loan with a larger down payment.
CURT: So it’s going to be built in to your mortgage payment. You’re going to see it on your statement. The lender does what is called escrowing, so they escrow the amount of the mortgage insurance premium and then the lender sends it separately to the mortgage insurer as part of your mortgage payment.
JONATHAN: So it’s a monthly charge on top of your principle and interest payment, taxes, and insurance that you would pay essentially until the loan to value is at 80% or less.