Private Mortgage Insurance


Lenders mortgage insurance, also known as private mortgage insurance in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property. Typical rates are $55/mo. per $100,000 financed, or as high as $125/mo. for a typical $200,000 loan.

Home Ownership by Country

Home Ownership by Country

Private Mortgage Insurance

Private Mortgage Insurance is a mortgage product used by lenders to reduce their risk when lending money to borrowers with a higher likelihood of defaulting on their home payment.

PMI is a requirement for conventional loans where the down payment made by the borrower is less than 20 percent of the purchase price of the home, or in case the borrower is refinancing on a home with equity less than 20 percent of the home value. PMI has to be paid on a monthly basis until enough equity is accumulated in the home.

How Much Does PMI Cost?

Private Mortgage Insurances can cost anywhere around 0.25% to 2% of the outstanding loan per year. It depends on the amount of your down payment, credit score, and the term of the loan. The rate increases along with the risk factor while each insurance provider updates the rate annually. There are only a handful of PMI companies in the US, and all of them keep their rates on almost the same level.

Borrowers can also choose to pay their PMI as a single upfront premium at the time of closing.

Keeping Track of the Payments

It is important for borrowers to keep a track of their payments in order to avoid paying PMI even when it is no longer required. Lenders should be notified as soon as the borrower reaches 20 percent equity and the PMI premiums will be discontinued. Homeowners Protection Act requires lender to automatically cancel the insurance as soon as the down payment and paid-off principal amount equals 22 percent of the actual purchase price of the property.

Equity can also grow due to appreciation of property prices. PMI will be cancelled in this case as well. If all the payments have been made on time, the lenders cannot refuse the request to cancel the PMI.

Further Reading

  • State foreclosure laws, risk shifting, and the private mortgage insurance industry – [PDF]
  • An option-based pricing model of private mortgage insurance – [PDF]
  • Pricing private mortgage insurance – [PDF]
  • Redlining, the Community Reinvestment Act, and private mortgage insurance – [PDF]
  • The effect of state foreclosure laws on loan losses: Evidence from the mortgage insurance industry – [PDF]
  • Exporting mortgage insurance beyond the United States – [PDF]
  • An option-theoretic model of catastrophes applied to mortgage insurance – [PDF]
  • Home equity loans and private mortgage insurance: recent trends & potential implications – [PDF]
  • Choice, Capital, and Competition: Private Mortgage Insurance Application and Availability – [PDF]