What Is Private Mortgage Insurance?

When you take out a new mortgage or refinance an existing one, you may need private mortgage insurance (PMI). Such insurance provides greater security for your lender, and may help you to qualify for a mortgage. However, it also increases the total cost of your mortgage.


When Do You Pay Private Mortgage Insurance?

Mortgage insurance may sound like extra security for you, but it’s actually extra security for your lender. It alleviates risk by providing an alternative way to recover funds if you stop making payments. You usually have to add PMI to your mortgage agreement if:

  • You make a down payment of less than 20 percent of the purchase price.
  • You have less than 20 percent equity in your property when you refinance.

When PMI is included, you usually pay a premium every month with your mortgage payment. Sometimes you may have to pay an up-front premium instead of, or in addition to, monthly premiums.


How Much Does Private Mortgage Insurance Cost?

The cost for PMI varies, depending on the perceived risks. Several factors determine what kind of product your lender is prepared to offer. These include:

  • The size of your down payment: PMI reduces as the size of your down payment increases.
  • Your credit score: Lenders are more likely to charge more PMI to high-risk borrowers.
  • Your debt-to-income ratio: A very high debt-to-income ratio signifies higher risk and may increase PMI costs.
  • Use of property: PMI is usually less for a primary residence.


Avoiding Private Mortgage Insurance

The most effective way to avoid paying PMI is to have a 20 percent down payment. Unfortunately, that’s often easier said than done. Alternatively, some lenders offer conventional loans without PMI, but these may have less favorable terms. It may also be possible to opt for a different type of mortgage, such as a Federal Housing Administration (FHA) loan. If you do need to pay PMI, take steps to ensure your credit score is strong, and pay as much down payment as possible.


Removing Private Mortgage Insurance

It’s often possible to cancel insurance payments once you have 20 percent equity in your property. However, if you opted for an FHA loan or want to cancel PMI sooner, you need to refinance instead. When you refinance, you pay off the existing mortgage and take out a completely new one with different terms. It’s important to make sure the new mortgage is more favorable—and that’s where Refi comes in. Refi’s loan validation and matching service helps to ensure you find products that suit your current situation. Find out more at Refi.com by completing the online loan inquiry request today.