What is private mortgage insurance (PMI)?

Private mortgage insurance is more recognizable by its acronym, PMI, yet many people still don’t understand exactly what is involved in this service. This is another type of insurance that your lender will probably require you to buy as you finance your new home with a traditional mortgage. It provides coverage for the lender against the possibility that you may default, or stop paying, on your mortgage. This is more for the benefit of the lending institution than it is for the home buyer.

The lender will arrange for the policy to be provided by a private insurance company, which means you likely won’t have the opportunity to shop around for a better policy. While not everyone taking out their first mortgage is required to pay for private mortgage insurance, it is a common requirement for those paying a down payment less than the usual 20% requirement. Homeowners trying to refinance may also be required to pay for a PMI policy if they have under 20% equity in their homes.

How are Homeowners Expected to Pay PMI Premiums?

While there are many payment options available to home buyers, the lender typically determines the terms. They may offer a variety of payment options, but some lenders do require home buyers to comply with just one type of payment plan. For this reason, it’s important to question potential lenders about their PMI requirements, and their payment plans.

There are three common methods of paying for private mortgage insurance.

Monthly Premium
This is a payment that will be automatically added to your monthly mortgage payment. You can verify that you’re paying the premium, and find out the amount of the premium, on two documents. The loan estimate will include this figure as a part of the itemized estimate. There, you can see how the PMI payment will affect your total monthly premium prior to agreeing to take out the loan.

Additionally, the PMI payment information will be included on the first page of the closing disclosure. If you can down to the Projected Payments section of the document, you will see the PMI payment included with these figures.

One Up-Front Premium
Another option that may be provided by DC mortgage lenders is the possibility of a one-time premium to be paid in advance. To find out how much the premium will be, you can look for the information on the loan estimate. Additionally, it will be found on the second page of the closing disclosure in the part labeled Section B. In most cases, the payment is non-refundable, which means you’ll lose that money if you move, or refinance the loan.

Up-Front Down Payment with Monthly Premiums
The third option is to make a lower advance payment with additional monthly premiums added to your ensuing mortgage payments. In this case, you can find information about the initial payment and follow-up monthly premiums on your loan estimate and closing disclosure documents. The initial payment will be found on the second page of each document in Section B. The monthly premiums will be listed on the first pages of the documents in the Projected Payments sections.

How Can a PMI Affect You?

There is one advantage for the home buyer provided by private mortgage insurance, which is that it can help you qualify for loans that might otherwise be more difficult to obtain. Unfortunately, that’s where the benefits end. If you do get in trouble with your mortgage down the road, the PMI policy won’t help you. It’s sole purpose is to benefit the lender. 

In some cases, you can get a loan that allows you to make a lower down payment, yet won’t require you to foot the bill for a PMI policy. Unfortunately, you’ll likely be paying a higher interest rate on the loan. So, in evaluating these mortgage solutions, you’ll have to consider that trade off. You’ll also have to determine how a PMI will affect your taxes differently than paying a higher rate of interest. Consulting a tax advisor can help you make this determination.

There are several factors that go into determining whether a loan with required private mortgage insurance is preferable to other low down payment mortgages. When evaluating these various factors, you may find that paying for a PMI policy is less expensive than the terms on other low down payment loans. These factors include:

  • Credit score
  • Amount of down payment
  • The lending institution
  • Current market conditions

Another alternative that many people find preferable is to put off their home purchase until they do have the required 20% down payment. If you can make the 20% payment, you won’t be required to obtain the PMI insurance policy. You may also find that you’ll be paying lower interest on your monthly mortgage payments. Lenders will be happy to show you the pricing options, so you can make a more informed decision.

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