Private mortgage insurance is coverage that protects lenders in case borrowers can’t make their payments.
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
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.
Here are the answers to some frequently asked questions about PMI.