What Is PMI and When Do You Pay It?

Private mortgage insurance, commonly called PMI, is an insurance product that may be required on some conventional mortgages when the borrower makes a smaller down payment. It protects the lender against certain losses; it does not protect the homeowner from missing payments.

Why PMI changes the budget

PMI is an additional housing cost. It is separate from principal, interest, property taxes, homeowners insurance, and HOA dues. If it applies to your loan, leaving it out of an affordability estimate can make a home appear less expensive than it really is.
The amount and cancellation rules depend on the loan, lender, insurer, property, and borrower’s circumstances. Do not assume that every mortgage uses the same calculation.

Is PMI required with every loan?

No. Loan programs use different mortgage-insurance structures and eligibility rules. The describes common conventional-loan situations, including the relationship between a 20% down payment and PMI. Ask a lender for the exact monthly amount, upfront charges, and cancellation terms for your offer.
Government-backed loans may use different forms of mortgage insurance. Comparing loan programs requires more than comparing the down payment because the rate, upfront charges, annual or monthly insurance, and qualification rules can differ.

How to plan for PMI

If you are considering a down payment below 20%, ask for written estimates under at least two scenarios. Include:
1.The loan amount and interest rate.
2.The monthly mortgage-insurance amount.
3.Any upfront insurance premium or finance charge.
4.Property taxes and homeowners' insurance.
5.HOA fees and other recurring property costs.
6.The conditions and process for cancellation or termination.
The can show the payment and escrow-related components, but it does not automatically calculate PMI. Add a PMI estimate from the lender to your own budget or monthly total.

Bottom line

A smaller down payment may help you buy sooner or preserve cash, but it can increase the monthly cost through mortgage insurance and a larger loan balance. A larger down payment may reduce those costs but can reduce your cash reserve. Compare the complete offer instead of treating PMI as an isolated fee.

References

[1] Consumer Financial Protection Bureau: What is private mortgage insurance?
[2] Consumer Financial Protection Bureau: Mortgage key terms

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