What is PMI (private mortgage insurance)?

PMI is a type of mortgage insurance which, when you purchase a home, is usually required on conventional loans when your down payment is less than 20%. PMI is different than other types of insurance in that it protects the lender, not the homeowner.

How much does PMI cost?

PMI rates vary. The rate will depend on the percentage of your down payment, your credit score and the PMI company. Rates generally range from 0.55% to 2.25% of your original loan amount – or $550 – $2,250 for every $100,000 borrowed.

For example, if you buy a home for $500,000 and put 10% down on a 30 year, fixed rate mortgage, and have a credit score of 700, you might pay about $207 per month for PMI.* This is in addition to your monthly payment of principal, interest, taxes and hazard insurance!

If there’s any silver lining at all with PMI, it’s that you usually don’t need to carry it for the entire life of your mortgage loan. Lenders are required to automatically cancel PMI on a conventional loan for your primary residence when your loan-to-value ratio reaches 78%. Or, you can request to stop paying PMI once your loan balance reaches 80% of your original property value.

Types of PMI

Each type comes with its own advantages that suit various situations. Choosing the right one can put you in an ideal home buying position.

1. Borrower-paid (BPMI) – The most common type and is often known simply as “PMI.” It is the “default” type of PMI, and the payment is tacked on top of your regular mortgage payment.

2. Lender-paid (LPMI) – The lender “pays” your mortgage insurance for you, that payment is factored in when a lender calculates what interest rate to offer.

3. Single premium – Allows you to pay the insurance premium as an upfront lump sum, eliminating it as an additional monthly payment.

4. Split premium – The least common type of PMI, allows you pay a portion of the insurance as a lump sum at closing. The remaining amount is then paid as borrower-paid additional monthly installments.