Private Mortgage Insurance (PMI): Definition, Types, and Process Overview

Many people believe buying a house in this current economy requires immense generational wealth. However, insurance like private mortgage insurance (PMI) makes owning property accessible and affordable.

If you are a lender, you can sanction mortgages with a lower down payment if you have PMI. This makes it a win-win situation for both parties. In this blog, we will dive deeper into what is PMI, its types, processes, and how you can get rid of it.

What is PMI Insurance? 

Private Mortgage Insurance is a contract between you and your lender where you pay a premium to protect the lender. Although it is still not a predominant insurance type in India, it occurs when you take a conventional mortgage and pay less than a 20% down payment.

PMI is primarily prevalent in the United States of America and helps lessen the risk lenders take. Moreover, it helps borrowers become homeowners with a lower payment.

How Does PMI Work?

Let us take an example. You are a lender, and Mr. Aggarwal approaches you to buy a house worth ₹10 lakh. He can only make a down payment of 10%, which amounts to ₹1 lakh.

So, if you decide to agree to this, you will be taking on a greater risk. Therefore, you ask Mr Aggarwal to pay an additional monthly premium for PMI.

If Mr Aggarwal stops repaying your loan, you will not incur losses because private mortgage insurance will cover it.

What are the Types of PMI?

Lender-Paid PMI

Lender-paid PMI, as the name suggests, means that your lender pays premiums to get PMI coverage. However, that does not mean that you do not have to pay any extra.

When the lender pays premiums, they charge you a higher interest rate on your home loan. This interest is usually higher than what you would pay if you took the insurance.

Moreover, lender-paid PMIs are not eligible for automatic cancellation, making it harder for borrowers to ease their financial burdens.

Borrower-Paid PMI

When searching for what is private mortgage insurance, we often come across the definition of borrower-paid PMI. This means if you are a borrower, you have to pay additional charges, which will contribute towards the premiums of the private mortgage insurance.

Although it might seem like a financial setback, it offers you benefits such as cancellation or reappraisal of your home. This feature allows homeowners to enter the competitive real estate market without having piles of cash.

Single Payment PMI

Typically, PMI is paid in the form of monthly instalments. However, in a single payment PMI, you pay a lump sum amount at the start of your mortgage.

If you opt for a single payment PMI, your mortgage payment will be much less. However, you may not have that much cash at hand to pay for the lump sum amount. Plus, if you sell your house in a short period of time, your PMI payment would be for nought.

Split Premium PMI

Have you ever wondered what is PMI and how you can split the premiums? This insurance policy combines both borrower-paid and lender-paid PMI into a single policy.

In this, you have to pay the majority of the insurance premium up front. But you can split the remainder into your mortgage payment. This helps lower your monthly mortgage payments and offers flexibility.

What Factors Influence the Cost of PMI?

Credit Score

The 3-digit credit score is a vital deciding factor for whether you are creditworthy or not. It usually ranges from 300 to 900. The higher your score, the lower your PMI cost will be. For example, if you keep your credit score between 750 and 900, your chances of getting higher credit will increase.

Loan-to-Value (LTV) Ratio

LTV assesses the lending risk that financial institutions have to take to approve a mortgage. You can calculate this ratio by dividing your mortgage amount by the appraised property value. Ideally, your LTV should not exceed 80% as a high LTV results in high borrowing costs and loan denial.

Down-Payment Amount

If you make a higher down payment, your PMI would be significantly less. Suppose, for a ₹20 lakh mortgage, you pay ₹4 lakh. Since it covers 20% of the mortgage, your PMI premiums will be lower.

How Can You Stop Paying PMI?

Now that you know what is PMI, let us see how you can lessen your financial burdens:

Cancellation Request

You can request private mortgage insurance cancellation if your loan-to-value ratio (LTV) falls to 80%. To do this, you need to write a letter addressed to your lender. You also need to approach a broker to get your home reappraised.

Automatic Cancellation

PMI gets automatically cancelled when your LTV ratio drops below 78%. Additionally, it could also get cancelled if you are 1 month past the midway point of your mortgage payment. You are eligible for automatic cancellation in these two scenarios, whichever comes first.

What is PMI vs Home Insurance?

Many people often confuse home insurance with private mortgage insurance. However, they are 2 different concepts, protecting different people. Let us see below:

With Bajaj General Insurance, you can buy our My Home Insurance All Risk Policy and enjoy benefits such as worldwide coverage, long-term cover, and all-risk coverage.

The Bottom Line

PMI can be a useful stepping stone for homebuyers who want to purchase a home sooner rather than later. By making smart financial decisions and knowing what is PMI early on, you can reduce extra costs and move closer to owning your home free and clear.

Apart from PMI, having home insurance will help you secure your belongings in your house. It will compensate in case you face any loss due to theft, fire, explosion or natural calamity. Bajaj General Insurance provides comprehensive home insurance plans at affordable rates. Buy the ideal one without any paperwork and hassle today from the website.

FAQs on What is PMI

How does private mortgage insurance work?

PMI protects the lender in case the borrower stops making mortgage payments. For example, if you buy a home for ₹50 lakh and pay 5% payment (₹2.5 lakh), your lender classifies you as a high-risk borrower. Therefore, you need to pay a premium for PMI so that if you default, your lender does not end up in financial risk.

When can I cancel private mortgage insurance?

You can cancel private mortgage insurance when you have built at least 20% equity in your mortgage. If you have a borrower-paid PMI, you can request cancellation via letters to your lender. 

Who does private mortgage insurance protect?

Private mortgage insurance protects the lender and not the borrower. It helps lenders mortgage high-risk borrowers without worrying about financial losses.

How much PMI do I have to pay per month?

The amount of PMI you have to pay depends on various factors, such as the value of your house, your credit score, the loan-to-value ratio, and the down payment amount. Depending on this, your lender will let you know the amount you have to pay. 

Are there any benefits to PMI for borrowers?

Yes, PMI lets first-time house buyers enter the real estate market without having too much cash. It makes owning property accessible.

*Standard T&C Apply

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.

Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.

Claims are subject to terms and conditions set forth under the home insurance policy.

All prices mentioned are dynamic in nature and subject to change with time.

The information provided is for general purposes only and is not intended as substitute for professional or expert advice. Appropriate guidance or consultation from relevant authorities for home-related concerns and queries is recommended.