The Good, the Bad, and the Origins of private mortgage insurance in America
While mortgage insurance may sometimes get a bum rap – it’s an extra chunk of money many homebuyers are required to pay if they put down less than 20 percent of the purchase price for a property – it’s not all bad. Mortgage insurance, also called private mortgage insurance, or PMI, allows many people to realize the dream of homeownership who might not otherwise be able to afford a home of their own.
Whether you are looking to buy a home now or plan to in the next few years, it’s important to understand all of the aspects that can be baked into your monthly mortgage and, ultimately, what that means to your bottom line. Here are five things to know about private mortgage insurance:
1. What is Mortgage Insurance?
Specifically, mortgage insurance is a type of protection often required by lenders when a buyer isn’t able to put down 20 percent of the purchase price of a home. Believe it or not, mortgage insurance has been around for more than 130 years, notes the Center for Insurance Policy and Research. It dates back to the 1880s when financial institutions first began loaning money to those looking to buy land and improve their fortunes in the Midwest and western United States.
2. Who it Protects (Hint: Not You)
While a homeowner is the one responsible for paying mortgage insurance if the financial obligations mentioned previously aren’t met, it’s important to understand, notes the Consumer Finance Protection Bureau, that mortgage insurance protects the lender if you can’t make your payments. In other words, it does not protect you. And on top of PMI, most lenders require buyers to also purchase separate homeowner’s insurance to protect the structure and property they are buying from damage.
3. How to Calculate PMI
There are a few ways to figure out how much your estimated mortgage insurance will add to your monthly house payments. Generally, the cost of PMI varies depending on the amount you owe on your mortgage compared to its value and your credit score, according to Freddie Mac, the publicly-traded company also known as the Federal Home Loan Mortgage Corporation. You can check in with a loan officer at your local credit union or bank, or you can let an online calculator help crunch the numbers for you. This online PMI payment calculator provided by Freddie Mac can help you get an estimate of what you may pay in PMI premiums. (You’ll need to know your down payment amount for this estimate.)
4. Which Loan Helps You Avoid PMI?
For those who qualify for a Department of Veterans’ Affairs-backed loan, including veterans, service members, and their families, the VA guarantee — in essence — replaces the need for mortgage insurance, according to the CFPB. With loans backed by the Veterans Administration, there is no monthly mortgage insurance premium. Instead, you pay what’s known as a funding fee. This fee varies and depends on a few different things, including the size of your down payment; type of military service; disability status, and if you’ve had a similar loan previously. Before signing on the dotted line, run the numbers to make sure the fee doesn’t end up costing more than the PMI.
5. How to Cancel PMI
Fortunately, private mortgage insurance typically doesn’t last for the life of most home loans. According to the CFPB, homeowners have the right to request a loan servicer drop the PMI when the balance of a mortgage falls to 80 percent of the original value of your home. (And you are up-to-date on your payments, among other requirements.) You can also ask to have the PMI canceled earlier if you make extra payments that lower the principal balance of your mortgage to 80 percent of the original value of your home, notes the CFPB. Like so many things, though, there are exceptions. Check out this explainer from the CFPB for even more on how to have your PMI canceled.
Jean Chatzky with reporting by Casandra Andrews