Private Mortgage Insurance (PMI)

For decades, standard practice had bankers requiring a 20% downpayment for mortgage loans. Private Mortgage Insurance (PMI) was created as a form of insurance for those borrowers who could not come up with the 20% down.

PMI usually allows a borrower to borrow up to 90% of the loan but take out an insurance policy which will pay the bank foreclosure costs if you default on the loan. Usually PMI is about $55 per $100,000 per month.

If you are interested in the best interest rate and payment for a home mortgage, have a 20% downpayment. If you can’t put 20% down or have a more lucrative use of some of that downpayment, then a lower-downpayment mortgage with PMI (Private Mortgage Insurance) may be the right loan product for you. Fannie Mae, the quasi-governmental agency that buys loans from lenders, require that loans with less than 20% down have Private Mortgage Insurance PMI.

PMI doesn’t protect you, it protects the lender from you defaulting on your loan. The price you pay for having less “skin in the game” is the extra PMI payment added on to your monthly mortgage payment..

The amount of downpayment required will vary from 5% – 15%, and changes depending upon the state (states with distressed home markets have large downpayment requirements), your credit score and other factors, so it is best to check with your lender to determine what current loan products are available.

You’ll want to compare the interest rates, PMI payments and fees with another loan product that uses federal mortgage insurance, the FHA loan, to determine what is the better deal Talk to your lender about comparing these two products.

Piggyback Loans vs PMI.