A Homebuyer’s Guide to Private Mortgage Insurance

After closing thousands of loans throughout our tenured history as a mortgage lender, we at Quaint Oak Mortgage want to continue helping consumers achieve their dream of homeownership. Bridging the education gap between our customers and the world of real estate finance is our next endeavor. In this article, we’ve highlighted important information prospective homeowners should know about private mortgage insurance. 

What is Private Mortgage Insurance (PMI)?

Private mortgage insurance (PMI) is an insurance policy that compensates lenders or investors in the case of a borrower failing to make their payments. Commonly known as MI or PMI, mortgage insurance first became popular in America in the early 1900s. The Great Depression caused most insurers to go bankrupt and as a result the industry evaporated completely for over 20 years. Mortgage insurance was reintroduced in the 1950s as a means of providing more affordable financing solutions to prospective homebuyers. Today, the mortgage insurance industry helps facilitate over $500 billion in real estate transactions on an annual basis. 

PMI is available for conventional loan programs.

Is PMI Required?

When talking about conventional loan programs, the determining factor on whether or not PMI is required is the loan-to-value (LTV) ratio. The LTV is calculated by taking the loan amount and dividing by the lower of the sales price or appraised value. If the LTV is 80% or lower, no PMI is required.

If the loan to value exceeds 80%, PMI is required to be part of the loan.

When PMI is Required, What Options Does Quaint Oak Mortgage Offer?

For conventional loan programs, there are a variety of options when it comes to private mortgage insurance. Factors such as the down payment and credit score may make one type of PMI more suitable than another. Not all PMI options are available to all products with the exception of the monthly premium. Here are the most common types of PMI:

• Borrower Paid Monthly Premium – By far the most popular PMI option. The mortgage insurance premium is added to the mortgage payment and paid by the borrower each month.
  • Will This Be Paid for the Life of the Loan? – The short answer is, that depends. There are many factors that determine if PMI can be canceled based on payment status such as if you are current on your loan, occupancy type, number of units, loan program, and more. For example, on a 1-unit primary residence where the loan is current, the PMI will automatically cancel when the loan-to-value is scheduled to reach 78% or the mid-point of the loan, whichever comes first. Some PMI options do not automatically cancel at 78% LTV.
• Single Premium – In this case, the PMI is paid in one single lump sum at closing and there are no monthly premiums.
• Split Premium – Split premium PMI is a combination of the previous two options. A portion of the PMI is paid as an up-front amount at closing and there is a smaller monthly amount added to the mortgage payment.

Work with Quaint Oak Mortgage from Start to Finish

There is a lot of information to process when considering private mortgage insurance. Quaint Oak Mortgage has a team of knowledgeable mortgage professionals ready to help you in the home buying process and will assist you every step of the way. Contact one of our trusted mortgage originators today to find out the programs and options that may best suit you to obtain the dream of homeownership.