Mortgages & Financing
What is private mortgage insurance and how can I avoid it?
By Steve Lockhart
The short answer
Private mortgage insurance, or PMI, is what a conventional lender charges when your down payment is less than 20 percent. It protects the lender if you stop paying, not you, and it is the fee that lets buyers in with a smaller down.
Full answer
Private mortgage insurance, or PMI, is what a conventional lender charges when your down payment is less than 20 percent. It protects the lender if you stop paying, not you, and it is the fee that lets buyers in with a smaller down. PMI typically runs a small percentage of the loan each year, folded into your monthly payment. You avoid it by putting down 20 percent, or by choosing a loan structure that handles the risk differently, and once your equity reaches about 20 percent of the original value, the lender must drop it on most conventional loans. FHA loans use their own insurance, called MIP, which includes an upfront premium and rules that make it harder to cancel. The useful habit is simple: know which insurance your loan carries and know the day it can leave. We pencil the premium and the exit date into the decision before you commit.
Go a little deeper
Frequently asked
Questions people often follow up on
Is PMI the same as the mortgage insurance on an FHA loan?
No. PMI is for conventional loans and drops once your equity reaches about 20 percent. FHA uses MIP, the mortgage insurance premium, with an upfront piece and a monthly piece that are harder to cancel. Knowing which policy you carry is half the battle, and the papers always state it.
When does PMI leave a conventional loan?
The lender must cancel automatically once your balance reaches 78 percent of the original value, and you can request it sooner at 80 percent or with a new appraisal. The exact rule is in your closing documents, and we mark the date so the savings arrive on time.
Could a bigger down payment really save more than PMI costs?
It saves the insurance and can lower the rate, but it ties up cash you might want elsewhere. The right amount is the one your budget supports. We test a few down payment sizes on your own file and decide with numbers, not a slogan.
The Lockhart Method
The Lockhart Method
Your Home | My Strategy | Proven Results
My strategy: put the PMI line and its exit date on the table when we structure the financing. If the premium will outlive the plan, we change the plan. A buyer who knows the insurance is the same buyer who keeps the payment lean.
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