When buying a home and shopping for a mortgage there are lots of new and unknown terms and one of those is often PMI. What is PMI? PMI stands for private mortgage insurance and chances are if you are first-time buyer you will have to pay it.
First things first, PMI is for the lender, not for you. Typically, homebuyers who put down less than 20 percent on their homes are required to pay private mortgage insurance. PMI protects the lender in the event that you default on the loan.
Mortgage insurance requirements vary by loan type and are not inevitable. Different loan types will have different mortgage insurance requirements. You will want to shop around because some loans have no PMI requirements at all. If your loan has PMI some lenders may offer something called “lender paid mortgage insurance” in exchange for a slightly higher interest rate.
Here are some typical loans and the PMI requirements:
FHA loans: Require mortgage insurance to be paid up front and monthly if equity in the home is less than 20 percent.
VA loans: Do not require mortgage insurance.
USDA loans: Do not require mortgage insurance.
Conventional loans: Require mortgage insurance if equity is less than 20 percent.
If you have to pay mortgage insurance you are not stuck with it forever. Once you reach an equity position of 20 percent or more you will be able to stop making mortgage insurance payments. When you reach this position notify your lender, who will send you information on what is required for your specific loan program to get rid of mortgage insurance payments.