Private mortgage insurance, or PMI, is an insurance policy with the premium paid by the borrower with the lender as the beneficiary. That sounds a bit unfair, buying and paying for an insurance policy that benefits someone else? At first glance, maybe, but let's look a bit further into the function of PMI.
Traditionally, conventional mortgage lenders approving loans using Fannie Mae and Freddie Mac guidelines required a minimum of 20 percent down. While this was a burden for many it did keep Fannie and Freddie both not only solvent but profitable. Borrowers with "skin in the game" were less likely to default. Or so that was the theory.
But in 1957, a company called the Mortgage Guaranty Insurance Corporation, or MGIC, came up with an idea. What if an insurance company provided a mortgage insurance policy that covered the difference between the amount of down payment from the borrower and the minimum 20 percent down required by the lender? This insurance product soon became a hit and several insurers soon followed MGIC's lead.
For example, if a home was listed at $200,000 and a conventional loan required a 20 percent down payment, the borrower would have to come up with $40,000 as a down payment. But if the borrower only had 10 percent down, or $20,000, the PMI policy would cover the difference, or $20,000. If the borrower had five percent down, the PMI policy covered the remaining ขายบ้าน 15 percent, or $30,000 to the lender should the borrower default on the mortgage.
PMI premium amounts vary based upon the amount of down payment, the loan type and even for a first time buyer. The more risk to the insurance company, the higher the premium. How high is the monthly PMI premium? A loan with five percent down on a $200,000 on a 30 year fixed rate mortgage is about $100 or more added to the monthly payment.
PMI is a way for a borrower to obtain a conventional mortgage at a competitive rate without having to put 20 percent down. PMI has its place and should be an option for conventional borrowers.
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