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The Language of the Loan: PMI

  

  

  

  

  

  

  

  

  

This week, we take a look at PMI. Just what does that acronym stand for?

Post Mortem Interval? Yikes - no, that’s a little bleak.

Point of Maximal Impulse? Not gonna lie, sounds kinda awesome. But that’s still not it.

Unfortunately in the mortgage world, PMI stands for Private Mortgage Insurance, which many borrowers must pay on a monthly basis, in addition to their monthly mortgage principal and interest. For the purposes of this blog, we will be looking at how PMI works on Conventional loans (things work differently on government programs, etc.).

The textbook definition reads: PMI is a risk-management product which protects lenders against loss in the event that a borrower defaults on his or her mortgage. Most lenders require PMI for loans with a loan-to-value greater than 80%.

Uh…ok, sure! In normal person speak, it goes like this: if you put down less than 20% on a Conventional loan, you’re going to end up paying PMI. Typically, this adds up to somewhere between 0.3% and 1.5% of the original loan amount per year. Depending on the price of your home, this could mean hundreds of dollars.

And make no mistake - this isn’t insurance for you. PMI minimizes the risk that your lender takes on when they allow you to borrow their money - it guarantees that they get paid, even if you can’t make your payments and default on the loan. They are protected by a private insurance policy, just like your are protected by your homeowner’s insurance.

But it’s not all bad! Keep in mind, PMI offers benefits to you, the borrower, as well. PMI is what allows you to get financing, even if you don’t have 20% for a down payment. Without PMI, you wouldn’t even qualify for the mortgage, as you would be deemed too great a risk to the lender.

And you won't be paying Mortgage Insurance forever. Once you build up 20% equity in your home, you can request cancellation of mortgage insurance from your lender. In fact, your lender is required to cancel PMI when the loan-to-value ratio drops to 78%.

So while PMI may be a hassle from a financial perspective, it is necessary to the industry. Talk to your Midwest Lending Mortgage Pro; if it is possible for you to get financing without PMI, they’ll find a way!