What Is Private Mortgage Insurance?

Private mortgage insurance is coverage that protects lenders in case borrowers can’t make their payments.

Who needs PMI? PMI is typically required if you’re taking out a conventional mortgage and your down payment is less than 20% of the purchase price.

Here’s what you need to know about PMI to decide whether it’s worth paying for.

What Is PMI?

PMI is an insurance policy issued by a private company that will reimburse your lender if you default on your mortgage.

Mortgage lenders take on risk by assuming that you’ll be able to make your monthly payments and repay the amount borrowed. Lenders mitigate the risk posed by borrowers with smaller down payments by requiring them to purchase PMI. Borrowers who can put at least 20% down don’t need to pay for PMI because they have a greater stake in their property and are viewed as less risky.

How PMI Works

PMI is purchased by the borrower, but it only protects the lender. PMI doesn’t offer any protection to the borrower if they can’t make their monthly mortgage payments.

You’ll typically be required to buy PMI if your down payment is less than 20%, or if you are refinancing and have less than 20% equity. Once you hit 20%, you can cancel your PMI policy, though your lender may do this automatically when you hit 22% equity.

PMI can help you qualify for a loan you otherwise wouldn’t have been eligible for, but it will increase both your monthly payment and the overall cost of the loan. Whether it’s worth paying for will depend on your priorities and timeline.

Different Types of PMI

There are several types of PMI policies. Here’s a look at the key differences.

Borrower-paid mortgage insurance

With borrower-paid mortgage insurance, your premium is added to your monthly payment until you build 20% equity in your home.

Lender-paid mortgage insurance 

With lender-paid mortgage insurance, you avoid the monthly premium in exchange for a higher interest rate. However, this interest rate will remain even after you hit 20% equity.

Split-premium mortgage insurance

With split-premium mortgage insurance, you can pay for part of your coverage upfront as a way to reduce your monthly PMI payments. The rest will be rolled into your interest rate.

Single-premium mortgage insurance 

With single-premium mortgage insurance, you skip the monthly payments by paying for PMI in a lump sum at closing.

PMI Pros and Cons

Some of the advantages of PMI include:

• You may qualify for a loan you otherwise wouldn’t have been able to get.
• You can buy a home sooner rather than later.
• PMI can be canceled once you hit 20% equity.

However, PMI isn’t without drawbacks, including:

• Higher monthly payments.
• A higher overall loan cost.
• PMI only protects the lender.

FAQ

Here are the answers to some frequently asked questions about PMI.

Do all lenders require PMI?

Some lenders may offer conventional loans that don’t require PMI despite a smaller down payment. However, they often come with higher interest rates. Whether these loans are more or less expensive than mortgages requiring PMI depends on the interest rates.

What are some alternatives to paying PMI?

If you want to avoid PMI, then you could hold off on buying a home until you save for a larger down payment. Putting 20% down can help you score a lower interest rate and skip paying for PMI.

Another option is to take out an FHA loan instead of a conventional loan, if qualified. These loans are backed by the Federal Housing Administration and can help borrowers with lower credit scores and smaller down payments save money on their mortgage. However, keep in mind that mortgage insurance is required for all FHA loans.

What’s the difference between PMI and MIP?

MIP stands for mortgage insurance premium and is required for FHA loans regardless of down payment size, while PMI is for conventional loans when the borrower puts less than 20% down. MIP includes an upfront cost paid at closing and an ongoing cost in the monthly payment, whereas PMI can be paid as a monthly premium, upfront cost, or a combination of both. Both MIP and PMI protect the lender, not you.