Goodspeed: PMI protects the lender, not borrower


QUESTION: What is PMI? I hear a lot about PMI and how expensive it is and that borrowers should try to avoid it. What is it? Is it a bad thing? How do you avoid it?

ANSWER: Borrowers who put down less than 20 percent of a home’s purchase price are required by lenders to take out private mortgage insurance (PMI).

PMI does not insure or protect the borrower - it is for the protection of the lender should the borrower default on the loan. But borrowers must pay the premiums on the insurance, which is usually escrowed and included as part of their monthly mortgage payment.

PMI is not a bad thing, although it will add quite a bit to your monthly housing costs and reduce the amount you will be able to borrow since lenders count PMI as part of a borrower’s overall housing costs when figuring out how large a mortgage an applicant can afford.

Once borrowers achieve at least 22 percent equity in the home, they can request that PMI be canceled.

There are several ways for a borrower to reach the 22 percent threshold. One is through normal amortization. But if a borrower puts down only five percent, it could take some 20 years on a 30-year fixed mortgage to get to 22 percent equity through normal amortization.

A faster way to get to 22 percent equity is through appreciation, a major cash payment on the loan or improvement to the home. Lenders will usually require an appraisal (paid for by the borrower) to prove that the home has indeed risen in value and that the borrower’s equity in the home has reached at least 22 percent.

One significant exception is FHA-backed loans. Borrowers who take out a loan through the Federal Housing Administration (FHA) must pay PMI for the life of the loan.

Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: