As one of the nation’s most successful builders of quality, affordable housing, LGI Homes has helped thousands of people become homeowners for the first time. And through this experience, we’ve realized that the process of buying a home can be confusing—fraught with cryptic terminology, filled with reams of paperwork, and complicated by the many parties involved in completing a successful property sale. To that end, our “All About” series answers many frequently asked questions, giving homebuyers the knowledge they need to be confident and informed consumers. Today, we are talking about PMI—Private Mortgage Insurance.
What is PMI?
PMI—or private mortgage insurance—is an extra form of insurance required by lenders, the premiums for which are paid for by the buyer.
Who is required to carry private mortgage insurance?
Any borrower who carries less than 20 percent equity in the home at the time of the extension of credit by the lender is typically required to have PMI. For first-time buyers, this typically means borrowers who are not putting a 20 percent downpayment towards the purchase of the home, and are thus borrowing more than 80 percent of the home’s assessed value.
What does PMI actually cover?
Although paid for by the buyer, PMI is actually insurance coverage for the lender. The PMI covers the lender against loss should a borrower default on a loan, thereby making it feasible for lenders to extend housing credit to parties who might not otherwise qualify for a loan if these risk provisions were not available.
What is the average cost of PMI coverage per month?
PMI coverage typically costs from 0.5-1% of a home’s sales price. Therefore, for a home selling at $100,000, a borrower would see an additional charge of $40 to $80 added to their monthly mortgage payment.
If I am required to carry PMI, how long will that coverage be in effect?
Most agreements specify that a borrower is able to cancel their PMI coverage once they have vested a 20 percent stake in the home—in other words, once they have successfully paid off 20 percent of their home’s value toward their loan. The method in which PMI can be canceled varies from lender to lender, so you would have to check with your financer, but most require the submission of a cancellation request from the homebuyer to instigate the process.