Private Mortgage Insurance is a premium that borrowers pay when taking out a mortgage from a commercial lender and paying a down payment of less than 20 percent. In the event the borrower defaults on the Private Mortgage Insurance (PMI) insures the mortgage for the lender. Generally, a lender will require Private Mortgage Insurance on mortgages where the down payment made by the buyer is less than 20% of the purchase price of the home. This can also be interpreted as having a Loan to Value (LTV) ratio in excess of 80% suggesting the mortgage has a higher risk profile. Typical PMI rates may be between 0.50% – 1.00% but may occasionally fall outside this range. Rates whicb are many basis points above LIBOR are common amongst applicants with higher risk profiles.
NOTE: To see how this charge can affect the level of a mortgage repayment, see our handy mortgage loan calculator tool on our Personal Finance Calculator page.
The premium can be assessed either an “upfront” MIP (UFMIP) at the time of closing or an annual MIP that is calculated every year and paid in 12 installments.
Additional Private Mortgage Insurance Information
When borrowers apply for a home loan, lenders typically require a down payment equal to 20% of a property’s purchase price. The greater the down payment, the less leverage is used, this means lower risk for the lender. If a borrower is unable to afford that amount, a lender will typically look at the loan as a riskier investment and require that the borrower take out PMI. A big disadvantage of PMI is that once you have it, it may be difficult to cancel.
In addition, taking steps to avoid PMI, such as obtaining financing from additional sources to accumulate a sufficient down payment may lead the borrower into alternative troubles. Borrowing from a trusted source in these instances, such as the bank of mom and dad is a popular choice for first time homebuyers. Despite the cost, the insurance does allows buyers to become homeowners sooner and get them started on the property ladder. Buyers need to carefully weigh up the costs of the insurance over the applicable period and decide whether an upfront cost is acceptable versus delaying a property purchase.
