Exploring the Five Varieties of Private Mortgage Insurance
Discover the five different types of private mortgage insurance (PMI) and their respective characteristics and applications.
Private Mortgage Insurance (PMI) comes in various forms, and its specific variety depends on the type of mortgage you have and the lender's requirements. PMI is typically required when you have a conventional mortgage and make a down payment of less than 20% of the home's purchase price. Here are five common varieties of private mortgage insurance:
1. Borrower-Paid Private Mortgage Insurance (BPMI):
- BPMI is the most common type of private mortgage insurance. With BPMI, the borrower pays a monthly premium as part of their mortgage payment. The premium amount is based on factors such as the loan amount, the down payment, and the borrower's credit score. BPMI is usually canceled when the loan-to-value (LTV) ratio reaches 78%, meaning you've paid down 22% of the original home value.
2. Lender-Paid Private Mortgage Insurance (LPMI):
- In LPMI, the lender pays the mortgage insurance premium upfront, and in return, the interest rate on the mortgage may be slightly higher. This means that you don't make a separate monthly PMI payment. LPMI can be beneficial if you prefer a slightly higher interest rate rather than monthly PMI payments. However, it may not be cancelable, and the higher interest rate could cost you more over the life of the loan.
3. Single Premium Private Mortgage Insurance:
- With single premium PMI, the borrower makes a one-time, upfront payment for the mortgage insurance at the time of closing. This can be a significant lump-sum payment but avoids the need for monthly PMI premiums. Single premium PMI is usually non-cancelable, and the cost is often included in the closing costs or financed into the loan.
4. Split-Premium Private Mortgage Insurance:
- Split-premium PMI is a combination of upfront and monthly PMI premiums. The borrower pays an upfront premium at closing and a reduced monthly premium, which can make it more affordable than single premium PMI. The upfront premium may be partially refundable if you refinance or pay off the loan early. This type of PMI may be cancelable when the LTV ratio reaches 78%.
5. Mortgage Insurance Premium (MIP) for FHA Loans:
- While not technically private mortgage insurance, MIP is a similar concept. It's required for FHA loans, which are government-backed loans. MIP includes both an upfront premium (UFMIP) and an annual premium. The UFMIP can be financed into the loan, and the annual premium is typically paid as part of the monthly mortgage payment. MIP for FHA loans can be more expensive than BPMI, and it may be required for the life of the loan, depending on various factors.
The choice of PMI type may depend on your financial situation, the terms offered by your lender, and whether you prefer a one-time upfront payment, a higher interest rate, or traditional monthly premiums. It's important to discuss your options with your lender or mortgage professional when selecting the right PMI variety for your specific needs and circumstances.
5 Types of Private Mortgage Insurance (PMI).
There are five main types of private mortgage insurance (PMI):
- Borrower-paid mortgage insurance (BPMI): BPMI is the most common type of PMI. It is paid by the borrower in monthly installments, typically added to their mortgage payment.
- Single-premium mortgage insurance (SPMI): SPMI is a one-time payment that is made at closing. It is typically more expensive than BPMI, but it can save the borrower money in the long run if they plan on keeping their mortgage for a long period of time.
- Lender-paid mortgage insurance (LPMI): LPMI is paid by the lender, but it is typically passed on to the borrower in the form of a higher interest rate.
- Split-premium mortgage insurance (SPLMI): SPLMI is a combination of BPMI and LPMI. The lender pays a portion of the premium upfront, and the borrower pays the remainder in monthly installments.
- Piggyback loans: Piggyback loans are second mortgages that can be used to make up the difference between a borrower's down payment and the 20% required to avoid PMI. Piggyback loans typically have higher interest rates than first mortgages, but they can allow borrowers to avoid paying PMI altogether.
Which type of PMI is right for you depends on your individual circumstances. You should talk to a mortgage lender to discuss your options and choose the type of PMI that is best for you.
Here are some additional things to keep in mind about PMI:
- PMI is typically required when you borrow more than 80% of the purchase price of a home.
- PMI can be canceled once you have reached 20% equity in your home.
- Some lenders offer PMI cancellation options that allow you to cancel PMI earlier than 20% equity.
- PMI can be expensive, but it can help you to qualify for a mortgage that you might not otherwise be able to get.
If you are considering PMI, you should carefully weigh the pros and cons to decide if it is right for you.