What is PMI?
Private Mortgage Insurance (PMI) is required on all home loan transactions where the loan-to-value ratio is 80 percent or greater (Some cash-out refinance transactions require PMI at 75% loan-to-value). This means that if you bought your house for $100,000 and had a down payment of less than $20,000, you will be required by the lender to carry PMI. It makes sense as most expensive purchases in life require insurance. When you buy a new car, you are required to get car insurance.
PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI. Benefits of PMI PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.
If you make a down payment of less than 20% of the purchase price of the home, mortgage lenders generally require that you take out Private Mortgage Insurance (PMI) that protects the lender incase you default on your mortgage. You may need to pay up to a year’s worth of premium for this coverage at closing, which can amount to as much as several hundred dollars. One obvious way to avoid this extra cost is to make a 20% down payment. There are also other ways to eliminate PMI such as 80-10-10 financing which is further described in this section.
PMI stands for Private Mortgage Insurance. PMI is insurance, but it doesn’t benefit you directly. PMI insures the end lender against loan default. You just get to pay for it. Anyone with less than 20% down has to have PMI (or certain PMI alternatives). PMI is usually charged monthly (although there are a couple of options) and is added to your monthly loan payment.
