What is PMI?
PMI is a type of insurance that lenders require for conventional mortgages with a high loan-to-value (LTV) ratio. Lenders accept some level of risk with these mortgages, and PMI helps to lower that risk.
Although you (the borrower) pay for PMI, this insurance isn’t actually for you – it protects the lender. If you default on your mortgage, PMI helps to pay part of the remaining loan balance back to the lender. However, PMI does offer borrowers potential benefits too, such as helping you potentially qualify for a conventional loan amount that you might be otherwise ineligible for.
Do you know the difference between PMI vs MPI vs MIP?
Private mortgage insurance is often confused with a few related terms – mortgage protection insurance (MPI) and mortgage insurance premium (MIP). PMI is specific to conventional loans with lower down payments, protecting the lender in case of borrower default. MPI is designed to protect the borrower and may cover mortgage payments in events like death, disability, or job loss, depending on the policy terms. MIP, on the other hand, is tied to FHA loans and protects the lender in the event the borrower defaults on the FHA loan. MIP includes both a monthly premium and an up-front mortgage insurance premium (UFMIP), and it can be financed or paid at closing.
Many clients wonder if you can reduce or eliminate PMI?
You can get rid of PMI once your LTV ratio drops below 80%. To stop paying PMI, request termination from your lender when your LTV reaches this threshold. Generally, lenders are required to automatically cancel PMI when your LTV hits 78%.
The average annual cost of Private Mortgage Insurance (PMI) typically ranges from 0.58% to 1.86% of the loan amount, but can vary based on factors like credit score, down payment, and loan type.
- Example:
If you take out a $400,000 mortgage, your PMI costs may range from $2,000 to $6,000 per year (or roughly $167 to $500 per month).
I hope this information has been helpful. If you are thinking of buying, reach out to our lending partner at Motto Mortgage Simplified to get details about what is the best route for you. And remember, whether buying or selling, my team and I are on standby, 7 days a week, ready to help you take the smoother road to sold.