Private mortgage insurance (PMI) is a policy that protects the lender in the case of default by the borrower. The lender is assured of being compensated for their loss if you fail to make your monthly mortgage repayments. This is not a policy that protects you.
Why Do You Need PMI?
The role PMI plays in financing is simple: it ensures cash flow. The lender needs to know they will be paid back even if there are some extraordinary circumstances.
Any loan where the borrower has less than a 20% stake in the property must have PMI. If you put down 3.5%, you can obtain a 95% LTV mortgage without premiums, but as soon as that drops below 80%, you will need to get PMI for your security.
The benefits of having PMI are that it allows you to finance more than just 80% of the value of your home.
Remember, you do not need PMI if you pay 20%. The lender will give you a lower interest rate because they’re protected in case something happens.
How Does It Work?
When you receive your first billing statement, the lender will give you an annual percentage rate (APR) that includes PMI. Many people think this is their interest rate for the year; it’s not. It’s simply a way of allowing you to see how much PMI you will be paying each month.
Your mortgage lender will decide your true APY (annual percentage yield) and will depend on your credit score and down payment amount.
When Do You Need PMI?
For conventional loans, the lender must ensure that you have PMI once your LTV (loan to value) drops below 80%, but again, there are exceptions. If you opt for an FHA loan, which means you’re borrowing less than 95% of the home’s worth, then you may not need any premium payments at all.
If the borrower is on the hook for PMI, they’ll see how much of each payment goes to principal, interest, and PMI on each billing statement.
For example, if you made $1,000 in payments over one month, your lender would charge you $200 toward your principal, $300 toward interest, and $100 toward PMI. This gives you a clear understanding of where your money is going each month.
What Happens If You Do Not Have PMI?
If you are not paying for private mortgage insurance, then the riskiest part of the loan is what’s called “uninsurable.” Since the lender will assume no one could pay them back, they will charge you a higher interest rate.
Basically, by not paying for PMI, the lender makes the riskiest part of your loan uninsurable and charges you more than if you had insurance in place. You may then be asked to pay an extra month’s payment each year to compensate the lender for this risk.
Contact Pacific Lending Group for Any Mortgage Insurance-Related Advice
If you have any questions about private mortgage policy, please contact a representative from Pacific Lending Group. We will be glad to answer any of your mortgage questions and help you with your home purchase or refinancing needs. Call 954-227-4727