What is Private Mortgage Insurance (PMI)?

Private mortgage insurance (PMI) is an insurance policy used to protect lenders in the event that a borrower is unable to make payments on their mortgage. Certain home loans are viewed by lenders as being a higher risk than other loans. In the cases where loans are perceived as being riskier-ones in which the lender will need to cover 80% or more of the principal-the borrower is required to get private mortgage insurance (PMI).

private mortgage insurance [city2]

A PMI is made available from two sources: the government and private insurers. The primary government mortgage insurer is the Federal Housing Administration (FHA), while the private insurers are corporations.

It’s important for homebuyers in [city2] to understand that the lender does not pay the premiums on this type of insurance policy; the borrower does. And if the borrower defaults on their home loan, the lender is the beneficiary.

The precise percentage rate of the private mortgage loan varies depending on your down payment, but it can be anywhere from slightly over 1% to just under 0.4% of the original loan amount, paid annually. Those numbers may not seem intimidating on the surface, but they add up.

For conventional loans, the PMI must remain in place until the loan reaches 78-80% of the Loan To Value (LTV). So in the case of a 30-year loan, the borrower would be responsible for making PMI payments for roughly 24 years. In a few instances, the PMI never goes away and lasts for the entirety of the loan payments.

The good news about PMIs is that from the year 2007 and on, the payments are tax-deductible. Created around the time of the housing crisis and economic downturn, this form of payment allowed the total annual payments to count as an itemized deduction (with a few restrictions in place, mainly the household income). If you have any further questions I am happy to help or if you’re ready to set up a free pre-qualification review, contact me today!