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What is Private Mortgage Insurance (PMI)?

April 15, 2022

If you're on your homebuying journey, private mortgage insurance or PMI is a term you'll likely come across at some point. In this article, we'll give you the rundown of what PMI means, the role it serves, when you'll see it, and how you can avoid it.

What is PMI?

Private mortgage insurance is a fee applied to your mortgage loan by the lender when you don't put down at least 20% of the house's purchase price as a downpayment. You'll also be required to have PMI if you want to refinance your home with equity less than 20%.

What Role Does PMI Serve?

Private mortgage insurance is put in place to protect the lender NOT the borrower. If you can't pay back the funds and default on the loan, the lender can foreclose on the home and auction it off to recoup their losses. In most cases, they can receive around 80% of the home's value at auction. The remaining 20% is made from PMI fees added to the loan.

When is PMI Used?

Lenders will look at your loan-to-value (LTV) to determine if they will require private mortgage insurance or not. By comparing the amount of your loan to the value of the house you're looking to purchase, they can assess their risk in lending to you. Typically, if your LTV is 80% or higher, they will impose a PMI requirement.

How can a Homebuyer Avoid PMI?

If you want to avoid PMI altogether, the simplest route is to put down more than 20%.

However, if you've already started your mortgage and are locked in, there are a few things you can do to get rid of the extra costs. First, you could overpay on your monthly payment. Once you reach 80% paid and meet certain criteria, you can request to have the PMI removed.

You could also go for a new appraisal if the property value around your neighborhood has gone up in recent years. Your house still represents equity for you, so that new appraisal rating may be enough to put you in the range where you can request to have the PMI costs knocked off.


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