Private Mortgage Insurance (PMI) is quite simply an insurance policy that protects the mortgage lender in case of default on the mortgage. The lender will contract out to a PMI insurance company on any loan in which the customer is not putting down 20% or does not show a 20% equity position in the property at closing. The PMI company will insure the bank against default on the mortgage.
The amount of insurance coverage that the lender demands will vary according to the amount of the down payment and the terms of the loan itself. The coverage usually will be anywhere from 12% to 30% of the entire mortgage. This means that in case of default, the PMI company will guarantee the mortgage lender 12% – 30% of the mortgage will be paid back to them. The balance of the loan will come back to the bank upon the sale of the property once the foreclosure is concluded.
The amount of coverage determines the premium that must be paid for the coverage. The rule of thumb is that adjustable-rate mortgages require more coverage than fixed-rate mortgages. Also, putting less money down will require more coverage than a higher down payment would. No coverage is required once 20% down is reached. The customer is required to pay the premium with their monthly mortgage payment. Other items that may affect the rate of your PMI are what type of house you are buying (second homes and investment properties will have higher rates) and whether your premium has a refundability option. If, for instance, you can establish a 20% equity position in your property within a few years you may be entitled to a refund of a portion of your premiums. Generally, however, you will be paying more for these premiums on an up-front basis. An example of PMI coverage might look something like this.
A buyer of a $400,000.00 home plans to put 10% down on the property and take a mortgage of $360,000.00. The customer is getting a fixed-rate mortgage for 30 years. The required coverage on this type of loan would be 25% and as a result, the payments for a typical PMI premium might be .52% of the note amount annually. This means the customer will have to pay an additional ＄1872 / 12 months for every mortgage payment or an extra $156.00 per month towards their mortgage to cover PMI. Note: Figures are for estimate purposes only and do not necessarily represent exact figures. LTV (Loan to Value) indicates the percentage of the amount financed to the total purchase price or appraised value (whichever is less).
Check with your mortgage representative for rates and conditions of your PMI payment. Generally, they will be happy to help you with any questions that you might have on PMI. Since loan officers are not making commissions on the type of PMI that you choose, you can usually count on those with some experience to have accurate, reliable information for you. This should aid in making a decision as to what type of PMI may be right for your situation. Read our page on How to Avoid PMI Insurance for alternatives.