Private mortgage insurance (PMI) is a fee assessed on mortgage holders with less than 20 percent down payment on a conventional mortgage. The rate of PMI charged to the borrower is based upon their credit score.
PMI is added to your monthly payment by your mortgage servicer until your mortgage principle is paid down to less than 80 percent loan to value (amount of the loan versus the value of the house). The minimum borrower credit score requirement is 680 for most PMI companies.
It is insurance coverage for the bank to cover your debt in the event of your foreclosure. You do not receive any benefits from this insurance coverage. The higher the credit score of the borrower, the lower the perceived risk and therefore, the lower PMI rate is charged.
PMI is charged to conventional mortgages only. Due to new regulations, borrowers with lower credit scores, less than 680, are not able to receive PMI and must choose another option, such as Federal Housing Administration, Department of Veterans Affairs, or U.S. Department of Agriculture funding.
Some companies require PMI to be paid by the borrower for two full years, regardless of the principal balance of the loan. Others will remove it with an appropriate appraisal once the principal balance has been lowered to 78 percent loan to value. The borrower's credit score does not dictate the time frame of PMI charged.
PMI helps you to get into a home with less than 20 percent down payment, but it can cost you more in the long run than the original down payment would have. It is best to save for home ownership and avoid PMI, if at all possible. Additionally, the higher your credit score, the lower your monthly interest rate and PMI will be.
- Photo Credit Image by Flickr.com, courtesy of Jeff Turner
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