What Is Private Mortgage Insurance? | Andrew Hutchings | Long Beach, California

Private Mortgage Insurance (PMI) may be a term that you’ve heard thrown around when discussing homeownership and mortgage payments. It is a type of mortgage insurance that some lenders require.

The purpose of PMI is to protect the lender — not the borrower. Typically, it is put in place to protect the lender should the borrower stop making payments on their loan. It’s essential to keep this in mind, as most people hear insurance and make assumptions about what is happening.

Why Do Lenders Require PMI?

Mortgage insurance is generally required based on what is called a loan-to-value ratio. If the loan is higher than eighty percent of the (appraised) value, they are likely to ask for PMI. In other words, if homeowners are putting down anything less than twenty percent.

Types of PMI

There are five main types of private mortgage insurance. These different insurance types are:

  • Borrower-Paid Mortgage Insurance (BPMI): The most common type of PMI. BPMI Requires the buyer to pay an additional monthly fee. Owners will have to pay this insurance until their loan-to-value ratio hits twenty-two percent.

What is the Advantage of PMI?

At this point, many prospective homeowners may be wondering what the benefit of PMI even is. Again, it is designed to protect the lenders in this situation. However, dealing with PMI is worthwhile to those who want to own a home but cannot afford the full twenty percent downpayment. With the rising prices of homes, having a faster way to get into one of your own will always be appreciated by many. Additionally, the cost of a mortgage plus PMI may still be more affordable than the idea of renting. As with any significant financial decision, it is all about doing the math before coming to a conclusion.

Article originally published on AndrewHutchingsLongBeach.com

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Andrew Hutchings Long Beach

Andrew Hutchings is a Long Beach, CA real estate professional with forty years of experience in his field. Check out his website to learn more!