Private Mortgage Insurance (PMI)

In addition to homeowner’s insurance and title insurance, private mortgage insurance is the third insurance policy you’re likely to have in a typical closing. Private mortgage insurers are usually separate companies that specialize in insuring mortgages. They’re not connected to a government agency, mortgage company, or investor. PMI is required if you have less than a 20 percent down payment. It insures the lenders against your not making your payments and their having to foreclose. The monthly premium is calculated on a sliding scale.

A 5 percent down payment will cost more than a 10 percent down and is calculated on the loan amount. For instance, a $150,000 home with 5 percent down payment might have a .70 percent premium or $87.50 per month. A 10 percent down payment could have a .50 percent premium or $62.50 per month. Your monthly rate can also depend on your credit rating as well as the loan amount.
The PMI is supposed to drop off when the loan is paid down 20 percent. But recently, with lower interest rates and rising house values, many homeowners simply refinance and show they have at least 20 percent equity, thus avoiding the PMI.

On FHA insured loans, however, the PMI doesn’t drop off. So the strategy is to get into the house with an FHA loan and then refinance to a conventional 80–20 loan as soon as possible.