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February 03, 2016

How It Works: PMI

Homeownership
How It Works: PMI - image of hands cupped over a miniature house on a desk

How It Works: PMI

In simplest terms, Primary Mortgage Insurance (PMI) is an added insurance policy for homebuyers who make down payments on their homes that are less than 20%. The monthly PMI fee you pay protects the lender if you are unable to pay your mortgage.

How It Works

If you make a down payment of less than 20%, PMI will be part of your monthly mortgage payment.

  • The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score. You can expect to pay between $30 and $70 per month for every $100,000 borrowed.
  • You'll have to pay PMI until you've built up more than 20% equity in your home. Borrowers with FHA loans are responsible for paying FHA mortgage insurance premiums for the life of the loan.
  • If you're current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original value of your home. That date will be given to you in writing on a PMI disclosure form when you get your mortgage.

    You can request that your lender cancel your PMI if you've made additional payments or if rising home values have increased your home equity to more than 20%. Your request must be in writing and meet additional criteria that your lender specifies.

Some Perspective

It's a fact that the more you put down as a down payment, the lower your monthly mortgage payment and the less you'll owe the bank. It's also a fact that homebuyers who put down at least 20% don't have to pay PMI. However, if putting down 20% will deplete all of your savings and leave you with no financial cushion, it's probably not in your best interest.

PMI is no doubt an added cost, but it enables you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment. Learn more about down payments and the options that may be available to you.

Follow this series to learn more about how things work in the mortgage industry and visit My Home by Freddie MacSM where we discuss it all. Read the previous posts in our How it Works blog series.

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