Why Do I Have to Pay Private Mortgage Insurance (PMI)?
If I had a dollar for every time I explained the details of private mortgage insurance, only to be greeted at my conclusion with a blank stare, I’d easily have enough dollars to make it rain. Rain hard too.
What is Private Mortgage Insurance?
- What is PMI?
- Why Do We Have PMI Anyway?
- How Does This Work? Can I Remove It?
Private Mortgage Insurance (PMI), is a tool used to protect mortgage lenders against loss on loans that have higher risk factors. Usually, your loan to value ratio is the trigger. Over 80% LTV and you pay for private mortgage insurance, put 20% down on conventional financing and you don’t.
FHA loans, for the most part, always have mortgage insurance regardless of down payment. It is fixed at the same amount for most borrowers regardless of your credit worthiness or other factors that come into play on loans where conventional mortgage financing is used.
PMI has no direct benefit to you as a borrower, other than its very existence expands the ability of mortgage lenders to reach more potential borrowers and facilitate more home purchases.
I stand corrected, if you were a “borderline” borrower there’s a reasonable probability you ONLY were allowed the chance to buy through the existence of PMI. Although it can be sometimes be expensive, PMI serves a vital purpose.
The primary problem is that some lenders are restrictive on both type and provider of private mortgage insurance while other are simply ignorant to the options.
- Single Premium Financed MI – Single premium MI works the same way as the upfront mortgage insurance on an FHA loan – it’s financed into the loan balance.
- Lender Paid MI – When your mortgage lender pays the MI they typically do it through an adjustment to the interest rate of your loan. You don’t see the mortgage insurance on your statement, but you are paying for it.
The higher interest rate is for the life of the mortgage so if you plan on living in your new home for decades without refinancing, then lender paid MI is probably best avoided.
- Monthly MI – doesn’t need a lot of explaining. You pay it every month until you can drop the mortgage insurance from your loan. To drop the MI you need to reach 78% or less on your loan to value.
Generally, monthly MI is the only option you are quoted by your lender. It pays to inquire about ALL the mortgage insurance options though. Making the best PMI choice can result in thousands saved or thousands wasted.