It is vital for mortgage borrowers to understand how private mortgage insurance (PMI) works. This insurance is charged to borrowers who make less than a set percentage of down payment for their property. Unlike other insurance policies, PMI protects your lender, not your home.
Should you default on payments, PMI does not protect your property from foreclosure. PMI premiums are different. The amount charged for your loan depends primarily on the mortgage type you get from a Utah lender.
Here are the guidelines on how PMI affects different home loans, as explained by City Creek Mortgage.
If you are taking a traditional mortgage, you are generally required to pay PMI if your down payment is not more than 20% of your total loan.
The amount you pay in insurance depends on your loan’s amount and credit score, but it usually is 0.5–1% of your mortgage amount. Your PMI payments end when your loan to value reaches 80%.
For FHA mortgage borrowers who wish to avoid paying for PMI, they should pay a down payment of not less than 3.5% of their loan amount at closing.
Most lenders charge a PMI of 1.35% of your loan’s principal. FHA loans have an additional upfront private mortgage insurance premium. This upfront premium is typically 1.75% of your loan’s amount.
Like the FHA loan, a USDA mortgage has an annual and upfront PMI. The premiums are lower compared with other mortgages. With a USDA loan, your lender will typically charge a yearly PMI of 0.5% of your principal, which is split into monthly payments and an upfront PMI of 2%.
In most cases, the lender chooses the insurance company for your mortgage. You, therefore, have little control over the premiums they charge you. With a good understanding of how your insurance affects the loans above, however, you are better-placed to make the right choice.