Understanding Mortgage Insurance (PMI): A Key to More Affordable Homeownership

Making Homeownership Possible with Private Mortgage Insurance or PMI: An Affordable Home Buying Guide

Mortgage insurance helps make homeownership achievable, especially for buyers without a large down payment. Let’s demystify mortgage insurance, examining what it is and how it can facilitate your journey to home ownership.

What is Mortgage Insurance?

Mortgage insurance, often called PMI or private mortgage insurance, is a form of insurance that protects the lender. If a homeowner defaults on their mortgage and the foreclosure sale does not cover the outstanding loan amount, PMI covers the shortfall between the foreclosure sale proceeds and the outstanding loan amount. Lenders typically require mortgage insurance when the buyer’s down payment is less than 20% of the purchase price.

Why do Lenders Require Mortgage Insurance?

The main purpose of mortgage insurance is to reduce risk for lenders. A higher down payment acts as a safeguard for the lender if the buyer defaults. With a down payment of less than 20%, the lender takes on more risk, so mortgage insurance offers protection. PMI gives lenders a resource that enables them to provide mortgages to more people.

How much Does PMI Cost?

The cost of mortgage insurance varies. It depends on factors like the loan-to-value ratio, credit score, and down payment amount. Generally, the lower the down payment, the higher the mortgage insurance premium. It can be paid monthly as part of the mortgage payment or upfront as a one-time fee, often paid at the loan closing.

When Can Mortgage Insurance Be Removed?

Once the homeowner builds enough equity in their home, usually 20% or more of the home’s appraised value, they can request removal of the mortgage insurance. This can happen over time through regular mortgage payments and appreciation of the home’s value. 

The Path to a PMI-Free Mortgage

Shedding the PMI expense is all about building equity in your home. This equity can accumulate over time in a couple of ways:

By making regular mortgage payments every month, the amount owed to the lender slowly decreases, and this increases the homeowner’s equity stake. Also, as home values appreciate over the years, this builds additional equity for the homeowner when the home gets reappraised at a higher value. Through consistent payments and home value appreciation, borrowers can eventually reach the 20% equity threshold to qualify for removing their mortgage insurance costs.

Checking in with your lender to explore options for canceling mortgage insurance is an important next step on the affordable homeownership path. They can provide guidance and requirements to qualify for removal so buyers can get closer to owning their home free and clear.