What is PMI on a Mortgage? – Everything You Need to Know

What Does PMI Stand For?

PMI stands for Private Mortgage Insurance.

When is PMI Used?

The golden rule is that Private Mortgage Insurance is used when a buyer puts down less than 20% on a house. Generally we see Fannie Mae, Freddie Mac, FHA and VA loans utilize Private Mortgage Insurance.

All homeowners do not get PMI.

What is PMI?

Private Mortgage Insurance is essentially a risk layer that has been created by the banks to help mitigate their risk and thereby make them wiling to lend to buyers that are putting less than 20% down. PMI protects the lender – not the buyer – if they stop making their mortgage payments on the loan.

Why is it Important to Know About PMI?

Many potential home buyers don’t factor in the cost into their budget. Most people that don’t do this day in and day out don’t realize this is an expense (and how could you blame them!). When potential buyers start digging into the process they generally factor in Principal, Interest, Taxes and Homeowners Insurance into their monthly budget.

No one ever thinks about PMI. It is a rather hidden expense that can cost hundreds of dollars per month.

How Do You Pay For PMI?

A person can pay the PMI Insurance Premium upfront. Most homeowners however choose to pay the Private Mortgage Insurance premium monthly.

There are options to how PMI is paid for which a potential home buyer should talk to their mortgage banker about their specific situation and what is the most cost effective way.

How Much is PMI Insurance?

This is a loaded question as the cost is not a uniform cost or a specific PMI rate if you will. The cost of PMI is based off a potential buyers credit and the amount of they are putting down.

Broad strokes the rate is around .25 to .7 basis points. Keep in mind that PMI pricing does change based off of the market. For example, the cost of PMI skyrocketed after the Great Recession in 2008.

Basically, the lower the credit and the lower the down payment, then the higher the PMI cost.

Is PMI Tax Deductible?

Yes, PMI is tax deductible.

Other Articles That You May Find of Interest:
-        How to Get Rid of PMI
-        What Should a First Time Home Buyer Know?
-        The Simplicity of the Pre-Approval