Private Mortgage Insurance (PMI) for Beginners

It’s likely that you’ve heard the letters “PMI” in the process of preparing to buy a home. Most people understand that it’s an unavoidable fee that they’ll need to pay alongside their mortgage, but little more.

If you’re still unsure what PMI is and how it’ll affect you, we’ve put together an introduction to the ins and outs of private mortgage insurance.

PMI enables a buyer to purchase a home with a down payment below 20%. It’s a way to protect your lender in case you don’t pay your mortgage. Each month you’ll pay a fee that’s based on your credit score, type of loan, and the amount you’ve borrowed. Per every $100,000 you borrow from a bank, you could pay $30-$70 per month for PMI.

If you’re buying a $300,000 home, PMI can add upwards of $200 extra to your mortgage payment each month. Of course, it’s possible to avoid paying this fee by putting down at least 20% of your home’s cost as a down payment. For most Americans, 20% down payments aren’t the reality. The average down payment is around 11%. PMI is an addition to the mortgage that most Americans have to pay. Once you’ve built up equity in your home by paying toward your mortgage, it’s possible to cancel your PMI and save yourself that money each month.

The cost of your PMI will vary based on several factors. Your down payment and credit score are the determining factors and can mean you’ll pay anywhere between 0.3%-1.15% on the amount of your home’s loan.

Most people view insurance policies as a means of protecting themselves. This isn’t the case with PMI. This form of insurance protects your lender in case you stop making monthly payments. Lest you think PMI will protect you from foreclosure if you default on your loans, it will not save you from being foreclosed on or any negative effects of a foreclosure on your credit.

It’s also important to note that PMI is not the same as mortgage life insurance. A mortgage life insurance policy is one that will protect your family if you pass away before your mortgage has been paid in full. This is a great policy to have, but in no way related to PMI.

Some fees for your PMI will be due at closing. It’s important to do your research into the type of PMI you’ll be purchasing. Some premiums are due up front while some will allow you to roll them into your monthly mortgage payments. It’s important to know what’s expected from your PMI.

As a helpful way to allow for lower down payments, private mortgage insurance is great at helping buyers realize the dreams of buying a home but is an often misunderstood part of the home buying process. We hope this has helped to demystify some of the confusion often associated with PMI before you purchase your home!  

The Silva Group is here to help you with all of your real estate needs. Contact us at any time or feel free to call us directly at (267) 202-7400.