Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Sep 21, 2021

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Private mortgage insurance, known as PMI in industry-speak, is a type of insurance that protects lenders against borrower default. It’s typically associated with a conventional loan, being added to your mortgage payment when your loan to value is over 80%.

In short, PMI becomes necessary when the loan gets risky enough that the lender may lose out if they have to foreclose on the borrower. It opens doors for borrowers who cannot afford to put 20% down, though it can be removed if your home value goes up and the appraisal value puts you at an 80% or lower loan to value. If you’re not refinancing, your mortgage lender would have to sign off on it.

This helps balance out losses that may come from a lower sale price and costs if they have to repossess your home. Think Great Recession, when seemingly every home in America was worth less than what the borrower owed to the bank. This is especially common when there are large drops in the market after a market boom.

So to recap; you are paying for an insurance policy that protects the bank against you. Seems unfair, but you’re basically paying for the increased risk.

If you want to avoid it, bring more money to the table.

How much does PMI cost the borrower now compared to before?

The Good Old Days:

Back when we were all rich from selling each other homes, the charges for PMI insurance were typically paid up front (at closing).

You could have expected to pay points, up to 2% or more.

For example, if your loan amount was $180,000 (90% of the value of your home, 10% down payment) you might have had to bring $3,600 to the closing table to cover the cost of private mortgage insurance. Depending on the amount you put down, you might finance the amount into your loan. amount.

The New Deal:

Things have changed. Now, your PMI payments are spread out over the life of the loan. You can pay up front, but many find it more reasonable to pay a little each month. The $3,600 charge in the first example could now be just a few dollars per month for as many as 20 years on a 30-year mortgage. The sooner you reduce your LTV, the sooner you can get rid of it if it’s not built into your interest rate.

Hopefully your home will appreciate (and your mortgage will be paid down) to a point where you existing loan is not more than 80% of the value of your home. Then you can ditch PMI early, though lenders might require an appraisal, and the loan to value would have to be a little below 80%.

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What determines the cost of private mortgage insurance?

The amount of private mortgage insurance you pay over the life of the loan is tied to the amount of your down payment. Things like credit score, loan amount, amount of coverage, and transaction type (refinance vs purchase) also come into play here.

So if your down payment is just 5%, you can expect to pay more per month than if you were to put 10% or 15% down. PMI that translates into seemingly small numbers like 0.23% or 0.4% are common, but they can translate into a few hundred a month depending on your loan size. The better your credit and other factors, the less you’ll pay. The exact amount can also change from year to year.

Essentially, anything that drives up your mortgage interest rate will also increase your private mortgage insurance costs. Some borrowers pay some at closing and some later on. Others build it into their interest rate or pay the total up front. Lenders typically don’t care as long as you pay your mortgage insurance premium.

The private mortgage insurance company will likely want to collect an escrow equal to two months’ insurance premium at closing, i.e. between $200 and $400 when using the example above.

Is PMI worth it with your monthly mortgage payment?

It’s not uncommon for borrowers to come in with less than 20%. Even if your home is only $200,000, you’d need to bring in $40,000 without taking out another loan. PMI makes it possible for a more diverse range of borrowers to afford homeownership at a reasonable price.

Many times, your lender will quote and sign up for PMI for you. They’ll build it into your loan. If you have your own connections, you can always talk to your loan officer about your annual premium and payment arrangements.

Tip: How to get rid of private mortgage insurance.