What is private mortgage insurance? Definition and cost

Millennials were about to buy a house by the end of 2018, when the generation of 19 to 37 year-olds was behind most of the new mortgage lending in the United States, by volume , according to a previous report from Realtor.com.

The rise in mortgages is a result of the millennial generation as a whole, the group has bought more homes than ever and individually made smaller down payments despite rising house prices, which requires mortgages more important. In December 2018, according to Realtor.com's badysis of Optimal Blue mortgage data, the millennials buying a home had made an average down payment of only 8.8% of the purchase price.

However, even if a lower down payment can help first-time buyers, it incurs an additional cost. In addition to the higher monthly payments of a larger mortgage, buyers who buy less than 20% of the purchase price and take out a conventional loan – that is, it is not a question of a government loan – have to pay for private mortgage insurance (PMI).

PMI essentially protects the lender if the homeowner stops making his mortgage payments. The exact cost of the PMI is detailed in the loan estimate, but it can range from 0.3% to 1.2% of the principal balance of the loan, according to the Policygenius insurance comparison website. In other words, homeowners can expect to pay between $ 30 and $ 70 a month for $ 100,000 borrowed, according to Freddie Mac.

The PMI rate depends on the credit rating of the buyer and the terms of repayment of the loan. A higher credit score can result in a lower insurance payment because it means to the lender that the borrower is responsible for repaying the debt on time. According to Policygenius, the monthly amount should remain fixed throughout the life of the loan or as long as the borrower is required to pay.

Most often, the cost of mortgage insurance is factored into the monthly mortgage payments – as well as property taxes and homeowners' insurance – and paid to the lender, but there are some other things you can do. other options, explains Policygenius. The buyer can pay the lump sum amount of insurance in advance, although it is often better to simply use the money for the down payment. pay part of the insurance payment in advance, and another part by monthly payments; or opt for a higher interest rate if the lender pays the insurance in advance.

Once the owner has reached 20% of the capital of the house, he can apply for the PMI exemption for the rest of the loan. If a homeowner continues to make insurance payments and his own funds reach 78% of the original value of the home, the lender is required to cancel PMI.