QandAs: Loans

What is a Private Mortgage Insurance or PMI?

Answer:
Private mortgage insurance or PMI protects mortgage

lenders from financial loss if a borrower defaults on a mortgage loan. Most lenders will require PMI if your down payment is less than 20% of the purchase price.

The annual fee for this insurance is a fraction of a percent of the loan amount, usually 0.2% to 0.9% depending on your down payment. The more you can put down, the lower this percentage will be. Let’s say you take out a $95,000 loan to buy a $100,000 house and put $5,000 down. The PMI would cost about 0.75% of the loan amount ($95,000), or $712.50, which would add $59.38 to your payment. Note that PMI premiums can vary slightly among lenders, and it is no longer required once you reach 20% equity in your home.

An 80/20 Mortgage Loan is a good way to avoid paying PMI.


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