Are you financing or refinancing your home with a conventional mortgage loan? Are you making a down payment of less than 20% on your new home? Your lender will require you to pay private mortgage insurance or PMI. To learn more about PMI, check out these frequently asked questions.

What Is PMI?

It’s an actual insurance policy your lender has on your home. If your home goes into foreclosure, your lender will repossess and sell the property. Often, foreclosed upon homes are sold at a lower price than the home’s original sales price. If your lender can’t recoup the outstanding amount of the loan from the sale of the home, the insurance company that issued the PMI will pay the lender the difference.

PMI is a fee that is added to your monthly mortgage payments if you don’t make a down payment of at least 20%.

Why Does the Borrower Have to Pay for PMI?

Your lender requires you to pay the premiums just in case you default on your mortgage. While the lender is taking on the risk of loaning money to you, you are paying for part of that risk, especially if the lender considers you a high-risk borrower. Essentially, if you can’t make a down payment of at least 20%, PMI is like you’re making that down payment is smaller amounts over a specific time frame.  

How Do Lenders Determine if PMI Is Required?

Your lender compares your down payment to the home’s sales price to determine your loan to value (LTV) ratio. For example, if you buy a home for $200,000 and you put down $20,000, your LTV ratio is 90%. If you have an LTV ratio of 80% or more, you’ll have to pay PMI.

Lenders also look at your credit score and other indicators of high risk to determine if you’ll pay PMI. You may have to pay PMI (even if you have an LTV ratio lower than 80%) if you have:

• Poor a credit history
• Sold multiple homes recently
• Had a past foreclosure
• Unsteady or undocumented income

How Much Are the PMI Fees?

They can vary depending on your credit score, the size of your down payment, and the loan amount. They can range from 0.5% to about 1% of the entire loan amount on an annual basis.

What Are the Payment Terms for PMI?

Most PMI policies require you to pay the fee monthly with your mortgage payment. However, some PMI policies may give you the option to pay for PMI with a large upfront payment.

How Long Does the Borrower Have Pay for PMI?

You can ask your lender to cancel your PMI when you have at least 20% equity in your home. In other words, when the principal balance of your mortgage falls to 80% of the original value of your home, your PMI can be cancelled.  

How Can I Get My Questions Answered About PMI and My Particular Situation?

If you’re not sure if you’ll have to pay PMI or not, contact one of the mortgage specialists at Grandview Lending in Indianapolis. They can review your financial situation with you and answer any questions you may have about PMI. They can also help determine how much you may need to pay in PMI fees on your monthly mortgage, depending upon your individual situation.

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