Private Mortgage Insurance—What Am I Paying For?

Private mortgage insurance is insurance a lender takes out on less than prime or higher risk loans. This insurance protects the lender in the case of default on the part of the borrower, like foreclosure or a short sale. As a borrower, you can make less of a down payment, which is usually 20% of a home’s value, when PMI options are available. In fact, PMI allows some qualified borrowers the ability to borrow 100% of a home’s value.

Are PMIs expensive? Who pays?

Private mortgage insurance is bundled into your monthly mortgage payment with taxes and other fees—you pay for the private mortgage insurance. Over the maturation of your loan, you can expect to pay thousands into your lender’s PMI on your home.

PMI cost is applied based on a simple ratio: percentage loaned/value of home.

For instance, if you only make a 15% down payment on a home, your bank loans you an additional 5% on the 80% loan– 85/100. Typically a borrower makes a 20% down payment, so your borrower lends you an additional 5% on the value of your home.

• For every 5% extra you borrow after 80%, an additional percentage or fraction of a percentage will be added to cover the PMI expenses.

So, at 85% borrowed, you can reasonably expect to pay .5% on the principal of the loan for PMI insurance. At 5% intervals, 85%, 90%, 95% and 100%, you will likely incur additional PMI fees.

Again, these fees are applied to the principal of the loan. If you apply for 100% loan of $100,000, and you are assessed an annual 1.2% PMI fee, you will pay $1,200 annually—or 100 dollars for PMI a month.