What is PMI?

August 9, 2019
Author: New England Home Mortgage

Home buyers are no longer confined to a 20% down payment in order to qualify for a loan. Both FHA and conventional loans offer options with down payments between 3% and 5%. Because lenders are taking a bigger risk with the borrower putting less money down, private mortgage insurance (PMI) may be required.

What is private mortgage insurance?

“PMI is an insurance policy for the lender, that protects them against default,” explains Brian Faye, co-owner of NEHM.

PMI is typically required for buyers who put less than 20% down on a home or property.

Brian Taylor, also co-owner of NEHM, states, “The lender says (less than 20%) is not enough if something goes wrong with this loan. If you default (they) want an insurance policy to get bailed out.”  

When am I required to have mortgage insurance?

  • Conventional Loans - When you have a conventional loan, you are required to get PMI if your down payment is less than 20%. Once you have 20% equity of your home, private mortgage insurance can be canceled.
  • FHA Loans - FHA requires MIP for all loans. These last for the life of the loan, up to 30 years.
  • Other loans, such as CHFA and reverse mortgage loans, may require mortgage insurance depending on the lender.
  • Those that meet qualifications for VA and USDA loans typically do not need mortgage insurance.

What are payments like?

Mortgage insurance rates will vary depending on credit score, down payment, and lender.

With private mortgage insurance for a conventional loan, payments are typically lumped in with the monthly mortgage payment (this includes principal, interest, property taxes and homeowners insurance). FHA loans require the borrower pay two insurance premiums. One is an upfront premium and is 1.75% of the loan amount. The second is an annual premium, which can be included in the monthly mortgage payment.

Mortgage insurance can be a deciding factor in what type of loan to apply for. At New England Home Mortgage, we explain all your options to determine the loan that best fits your needs.

Watch the entire video to learn more!

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