by DaveN 
PMI stands for Private Mortgage Insurance, and it’s an important concept for new home buyers to understand, especially if they’re planning to finance their home purchase with a down payment of less than 20% of the home’s purchase price. Here’s an explanation of PMI:
1. What is PMI?
Private Mortgage Insurance (PMI) is an insurance policy that protects the lender, not you as the borrower, in case you default on your mortgage payments. It’s typically required by lenders when a home buyer puts down less than 20% of the home’s purchase price as a down payment. This insurance reduces the risk for the lender because a smaller down payment means you have less equity in the home.
2. Why is PMI required?
Lenders require PMI when the down payment is less than 20% because they consider loans with lower down payments to be higher risk. If you were to default on your loan, the lender might not be able to recover their full investment through a foreclosure sale. PMI provides some financial protection to the lender in such cases.
3. How is PMI paid?
PMI is typically paid as a monthly premium added to your mortgage payment. You will continue to pay PMI until your outstanding loan balance reaches 78% to 80% of the original home’s value. At this point, you can usually request that the lender remove the PMI.
4. Can PMI be avoided or removed?
Make a larger down payment: If you can afford to put down 20% or more of the home’s purchase price, you can often avoid PMI altogether.
Refinance your mortgage: Once you’ve built up enough equity in your home, you may be able to refinance your mortgage and eliminate PMI. This typically requires your loan-to-value ratio to be below 80%.
Automatic removal: Some loans automatically remove PMI when you reach a certain point in your loan repayment schedule. This usually happens when your loan-to-value ratio reaches 78% to 80%.
5. How much does PMI cost?
The cost of PMI varies depending on factors like the size of your down payment and your credit score. Typically, it can range from 0.3% to 1.5% of the original loan amount per year. Your lender will provide specific details about the cost of PMI in your mortgage offer.
6. Can I choose my PMI provider?
In most cases, you won’t have a choice in selecting your PMI provider. Your lender will arrange PMI on your behalf with an approved insurance provider.
Understanding PMI is crucial for new home buyers, as it can significantly impact the cost of homeownership, especially if you’re unable to make a 20% down payment. Be sure to discuss PMI details and costs with your lender and factor it into your budget when considering your home purchase.