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If you are in the market for a new home, you are probably realizing the real estate and mortgage worlds use words and terms that are unfamiliar to “regular folk.” One such term is Private Mortgage Insurance, or PMI for short.
PMI in a nutshell
Private Mortgage Insurance is a way to ensure the lender will be paid back in full should the borrower not pay back the mortgage. PMI is protection for the lender, not the borrower. If you fail to make your mortgage payments, you will still face foreclosure even if you’re paying for PMI.
Who has to pay for it?
PMI premiums are paid for by the borrower. The premium can be paid in one of two ways: a lump sum, or in monthly installments. If paid as a lump sum, it will be included with the closing costs. Or, it may be included as a line item in your mortgage statement and identified as your monthly premium for PMI. Some loans require both a payment at closing and an additional monthly premium.
Not all mortgages require PMI. In general, loans made where the principal total is 80 percent or less of the sale price of the home don’t require PMI. If you put 20 percent down, lenders see that as a sign that you’re a safe risk.
Home buyers that put down less than 20 percent may have to pay for PMI. Typically, costs are between 0.5 and 1.0 percent of the total value of the loan, with riskier loans requiring higher PMI payments.
When can I stop paying for PMI?
Once you’ve paid down enough of the loan to have 20 percent equity in your home (meaning your loan amount is less than 80 percent of the home’s market value), most lenders will no longer require you to have PMI.
Even once you reach 20 percent equity, you may have to pay for PMI a little longer. Policies are generally purchased for a year, and monthly payments are held in escrow to cover yearly premiums. You may have to continue paying the premium until the year in which you reach 20 percent equity ends.