Understanding Private Mortgage Insurance (PMI)
Private mortgage insurance may be required on certain conventional mortgage loans. Understanding how PMI works can help you make a more informed decision about your financing options.
PMI Basics
What Is Private Mortgage Insurance?
Private mortgage insurance, commonly called PMI, may be required on certain conventional mortgage loans when the borrower's equity or down payment does not meet applicable loan-program requirements.
PMI may allow qualified borrowers to obtain conventional financing without making a very large down payment. The specific mortgage-insurance requirements depend on factors such as:
- Loan program
- Loan-to-value ratio
- Down payment
- Property type
- Occupancy
- Borrower qualifications
- Applicable lender and investor requirements
Important Distinction
Who Does PMI Protect?
Private mortgage insurance primarily protects the lender or mortgage investor — not the homeowner.
Homeowners Insurance
Generally protects the property and homeowner against certain covered risks according to the insurance policy.
Private Mortgage Insurance (PMI)
Generally protects the lender or mortgage investor against certain losses related to borrower default. It does not provide homeowners insurance protection to the borrower.
Monthly Cost
How PMI May Affect Your Monthly Payment
Depending on the mortgage structure, mortgage-insurance costs may be included as part of the borrower's monthly housing expense. The amount can vary based on factors such as:
- Loan amount
- Loan-to-value ratio
- Credit profile
- Property occupancy
- Mortgage program
- Mortgage-insurance provider
- Other underwriting considerations
Mortgage Insurance Structures
How Mortgage Insurance May Be Structured
Mortgage-insurance structures can vary. Depending on the available mortgage program and lender, mortgage insurance may potentially be structured through:
- Monthly borrower-paid mortgage insurance
- Certain upfront or single-premium structures
- Certain lender-paid structures
- Other eligible structures depending on the loan program
Not all structures are available through every lender or program. Borrowers should compare the overall mortgage costs rather than evaluating mortgage insurance alone.
PMI Removal
Can PMI Be Removed?
Depending on the type of conventional mortgage, applicable law, investor requirements, loan history, property value, and lender servicing guidelines, borrowers may eventually be eligible to request cancellation or receive automatic termination of certain borrower-paid private mortgage insurance.
The exact requirements vary. Homeowners should contact their mortgage servicer for the requirements applicable to their specific loan.
PMI cancellation or termination is not guaranteed and depends on the specific loan, applicable law, and servicer requirements. Contact your mortgage servicer for details.
Comparison
Conventional PMI vs. FHA Mortgage Insurance
Conventional PMI and FHA mortgage insurance are different systems with different rules, costs, and cancellation requirements.
Conventional PMI
Private mortgage insurance may apply to certain conventional mortgages depending on the loan structure and applicable requirements. Requirements and costs vary by lender, program, and borrower circumstances.
FHA Mortgage Insurance
FHA loans generally require mortgage insurance under Federal Housing Administration requirements. FHA mortgage insurance has its own rules, costs, and cancellation requirements that differ from conventional PMI.
Weighing the Decision
Does PMI Make a Smaller Down Payment a Bad Idea?
"Not necessarily."
For some qualified homebuyers, mortgage insurance may make it possible to purchase a home without waiting until they have accumulated a much larger down payment. However, mortgage insurance adds to the cost of financing.
Borrowers should consider:
- Available savings
- Monthly housing budget
- Emergency reserves
- Closing costs
- Mortgage-insurance costs
- Down-payment amount
- Long-term financial goals
- Available loan programs
Questions to Ask
Questions to Ask Your Mortgage Professional
- 01Does this loan require mortgage insurance?
- 02How is the mortgage insurance paid?
- 03How does it affect my estimated monthly payment?
- 04Are different mortgage-insurance structures available?
- 05Under what circumstances might the insurance be canceled or terminated?
- 06How would a different down payment affect the financing structure?
The Big Picture
Mortgage Insurance Is One Part of the Decision
"Mortgage insurance is one part of the overall financing decision."
Borrowers should consider the complete mortgage structure when evaluating their financing options. Focusing on any single component in isolation may not give a complete picture of the overall cost and suitability of a mortgage.
Complete Mortgage Structure
Consider the Full Picture
- Interest rate
- Loan term
- Monthly principal and interest
- Mortgage insurance
- Property taxes
- Homeowners insurance
- HOA dues when applicable
- Closing costs
- Cash reserves
- Long-term financial objectives
Ready to Begin?
Explore Your Mortgage Options
Connect with the Prosper Path Group team to discuss your mortgage options and how mortgage insurance may apply to your specific situation.
Private mortgage insurance requirements, costs, payment structures, cancellation or termination requirements, loan terms, rates, and eligibility vary by loan program, lender, investor, mortgage insurer, applicable law, and borrower circumstances. This information is provided for general educational purposes and is not a commitment to lend. Borrowers should consult their mortgage professional and loan servicer regarding requirements applicable to their specific mortgage.
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