What is Private Mortgage Insurance?
A home buyer's guide to private mortgage insurance, the protection lenders require when you put less than 20% down.
We just passed the ten-year mark from that fateful December when the housing bubble burst. Almost a decade later, we've learned a lot - and a lot has changed. Gone are the 2007 financing days, where pretty much anyone who wanted to get a home loan had little trouble. To avoid another financial crisis, home lenders have put safeguards in place. Many of them are to protect the homebuyer from biting off more than they can financially chew, but some are to protect the lenders themselves. Private mortgage insurance (PMI) falls in the latter category.
Wait, wait, you might be thinking. I thought we were talking about mortgages, not insurance. And you're right - we are. But PMI straddles the line of both industries. So what is it?
Let's say you want to buy a home. But you're a first-time homebuyer. And you live in California. And you aren't a millionaire. So putting 20% down isn't exactly realistic. Good news! You can still get a mortgage. Bad news! Your lender isn't going to be as confident that you'll make every mortgage payment. So to protect themselves, lenders came up with an idea. What if you paid insurance to protect them in case you stop making your loan payments? Just like that, private mortgage insurance came onto the scene. It's an additional amount you pay, usually monthly, to protect your lender. The amount is relatively small, usually between 0.3 and 1.5% of your loan value annually. It's just a little something to safeguard your lender. After all, they've agreed to take on extra liability by offering you a mortgage without you paying the traditional 20% down!
If you're disheartened that your inability to put 20% down will have you paying PMI forever, don't worry! For most loans, you only need to pay PMI until you have 20% equity in your house. At that point, your lender can have more confidence that you're sufficiently invested in owning this home and probably won't just walk away from it. Once you hit 20%, talk to your lender about getting rid of PMI.
Like I said, most loans let you ditch PMI at a certain point. But laws for FHA loans changed in 2013. If you financed after 2013, put less than 10% down, and your loan term is more than 15 years, your FHA loan will require PMI for the life of the loan. You can get a full rundown of which FHA loans require PMI, and for how long, here.
Don't despair! If you've got more than 20% equity in your home and are ready to get rid of your FHA PMI, you can look into refinancing to eliminate it. See, you've got options!
Private mortgage insurance probably won't be your favorite thing about your home loan. But it's an important safeguard against another financial crisis like the one we just weathered.