What is Private Mortgage Insurance?

FAQ - pixabayIf you’ve been looking at buying a home, you probably have heard the letters “MI” or “PMI” tossed around. MI or PMI refers to private mortgage insurance, which you most likely will have to pay if you don’t have a 20% downpayment when purchasing your home with a conventional mortgage. Already lost? Don’t worry—here are some frequently asked questions about conventional financing PMI to help you understand what it is, why it’s part of your mortgage payment, and ways to possibly reduce it.

Why do I have to pay PMI?

PMI protects your lender in case you do not pay your mortgage. Today, it’s almost always required if you are putting less than 20% down on a home. It’s important to note that this is different than other, additional types of insurance you can purchase for your home, such as homeowner’s insurance or flood insurance.

How do I go about paying it?

Your PMI payments are typically built into your monthly mortgage payment. You may have heard of the acronym PITI when people talk about mortgage payments. This stands for Payment, Interest, Taxes and Insurance. PMI is part of the “I” in this acronym.

How long do I have to pay it?

Typically, PMI is automatically cancelled once you have paid off 22% of the value of your home. In general, you must be current in making your payments for automatic cancellation to apply. In some cases, you may be able to request cancellation of your mortgage insurance if you have reached 20% equity and meet certain criteria. Before you close on your loan, ask your lender about restrictions or exceptions to requesting cancellation of your mortgage insurance. If you have questions about the cancellation of your mortgage insurance or if you think you meet the criteria, contact your servicer.

Is there a way to reduce it or avoid it entirely?

One way to avoid PMI is by saving up for a 20% downpayment. If 20% is beyond reach, it’s still worth amassing as much as you can—generally, the more you put down on your home, the lower your premium. Another option is New Hampshire Housing’s conventional mortgage programs, which offer low or even no private mortgage insurance.

If a large downpayment is a significant barrier, remember that a conventional loan isn’t your only option. Government insured mortgages like FHA, VA, and USDA-Rural Development loans can offer lower downpayments than conventional mortgages (it is important to know, however, that with FHA loans you pay a mortgage insurance premium, or MIP).

Still baffled about how PMI factors into your mortgage? Talk to a housing counseling agency, or an even better option is to sign up for one of their homebuyer education classes. Understanding as much as you can about PMI before you close on a loan is important to fully understanding your financial obligations as a homeowner.

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