Understanding Private Mortgage Insurance
What is private mortgage insurance?
Mortgage insurance (private mortgage insurance - PMI for short), is insurance that protects a lender in the event that a borrower defaults on a home loan. It’s important to note that only the lender benefits from PMI. If a borrower defaults on their mortgage, PMI does not offer any protection to the borrower.
Is PMI Required
Mortgage insurance is usually required when the down payment for a home purchase is less than 20 percent of the purchase price - or when one has less than 20% equity in a refinance scenario. Monthly mortgage insurance payments are usually added to a borrower's total monthly mortgage payment. Since PMI adds to your monthly total mortgage payment, and only benefits the lender, it is important that you know when and how to cancel your mortgage insurance. You can ask your mortgage broker this question when you are looking at loan options. Read our handy canceling mortgage insurance page for the basics on when you can cancel PMI and the steps to take to get started with your lender.
How do you calculate your mortgage payment?
PMI fees vary, depending on the size of the down payment, the borrower's credit, and the loan type. Our Mortgage calculator has a field for PMI which requires a percentage - or what we call a mortgage insurance factor - which is used to calculate your monthly mortgage insurance payment.
So how do you know what mortgage insurance factor to plug into the calculator?
Some home loan programs, such as FHA and USDA have a one-size-fits-all factor that applies to all people using that particular loan type. Others such as VA don't have monthly PMI at all.
Here is a breakdown of the most common programs and associated PMI factors:
- FHA Home Loans - Monthly PMI factor for 30 year fixed loans is (.55%), but if you put down 5% or more the factor goes down to (.50%)
- USDA Home Loans - Monthly PMI factor for all 30 year fixed loans (.35%)
- VA Home Loans - Plug in (0.00%) no mortgage insurance required!
- Conventional Home Loans - Conventional loans a.k.a. Conforming, Fannie Mae, or Freddie Mac are more complicated. Go to MGIC's webpage to get your factor.
If all this has your head spinning, give us a call at 503-543-9999 and schedule a consultation. We can break everything down in layman’s terms and answer all your mortgage-related questions. From PMI to home loan types to what you should be doing right now if you want to buy a home in the next year, Cascadia Home Loans is your partner in homeownership.