What Is Private Mortgage Insurance?

Dated: January 31 2021

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The home buying process can be intimidating, especially when you start hearing terms you're unfamiliar with. So what exactly is private mortgage insurance (PMI) and how does it help buyers?

PMI is a type of insurance required by some lenders for a conventional mortgage loan when the buyer's down payment is less than 20% of the purchase price of the home. When a down payment is less than 20% of the home, the loan-to-value (home value) ratio is over 80% which is considered a high-risk loan for lenders and often results in a higher interest rate for buyers. PMI protects lenders and comes with additional costs to the home buyer, but it allows people who can't afford a 20% down payment to get a loan and become homeowners sooner.

Costs of PMI can vary depending on the amount of the mortgage, the loan term, and the down payment, but it shouldn't be more than 2% of the loan balance. The good news about PMI is that it doesn't last forever! Once the loan-to-value (LTV) ratio drops below 80%, borrowers can contact their lender and request to have the PMI removed from their loan or, if you're current on your mortgage payments, once the LTV ratio hits 78%, the lender is automatically required to cancel PMI costs.

Don't let a small down payment deter you from looking for a new home. There are so many loan options out there to help buyers finance the home of their dreams. Talk to a REALTOR® today to get started.

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Dawn Wild

Dawn Wild has always had a passion for real estate and is thrilled to be able to share it with others looking to buy or sell a home in Colorado. Originally from Vancouver, Canada, she relocated to Col....

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