Mortgage insurance
PMI Explained
Private mortgage insurance, usually called PMI, is an added cost on many conventional loans with a down payment below 20 percent. It can help a buyer qualify sooner, but it protects the lender if the borrower stops paying.
Quick Take
- PMI usually applies to conventional loans when the down payment is below 20 percent.
- PMI does not reduce your loan balance and does not protect you from foreclosure.
- Monthly PMI, upfront PMI, and higher-rate no-PMI options should be compared over the time you expect to keep the loan.
What PMI does and does not do
PMI protects the lender, not the homeowner. If the borrower falls behind, PMI does not make the payments and does not prevent foreclosure.
For the buyer, PMI is mainly a tradeoff. It may let you buy with less cash down, but it increases the monthly cost until the loan reaches the required equity level or the loan is otherwise changed.
How PMI shows up in the payment
The most common PMI structure is a monthly premium added to the mortgage payment. Some loans use an upfront premium, and some combine upfront and monthly charges.
Because PMI is separate from principal, paying it does not build equity. When modeling affordability, keep PMI in its own line so you can see how much of the payment is not reducing the debt.
When PMI can go away
For many conventional mortgages, borrowers can request PMI cancellation when the balance reaches 80 percent of the original value, and automatic termination can occur later if the loan is current and other requirements are met. Your servicer's rules and loan documents matter.
Home price appreciation may help your equity position, but do not assume it automatically removes PMI. Ask the servicer what evidence, appraisal, seasoning, and payment-history rules apply.
How to compare PMI with waiting
Waiting to save 20 percent down can avoid PMI, but home prices and rates may change while you wait. Buying sooner with PMI can make sense if the payment fits and the alternative is years away.
Use the calculator to compare the same home at different down payments. The difference between the PMI payment and the larger down payment is the cash-flow tradeoff.
Run the numbers