Understanding Private Mortgage Insurance

Learn what PMI is, when you need to pay it, and what it does for you

When you're going through the mortgage process, you'll run across plenty of acronyms, including LTV, ARM, APR, FHA and PMI, or private mortgage insurance. PMI is one of the less understood acronyms. Before you start the mortgage process, learn more about PMI and whether you need it.

What is PMI?

PMI is extra insurance that lenders will require borrowers to pay if the borrower puts down less than 20% of the home's value in a down payment.

Why do lenders require private mortgage insurance under these circumstances?

In the event of a low down payment, your mortgage loan will be greater than 80% of the home's value. This will cause the lender to assume more risk. In some cases, this would discourage the lender from issuing the mortgage at all. By paying PMI, the lender is protected should you default on the loan. This will allow you to go ahead in the mortgage process with a lower down payment.

How do PMI payments work?

Private mortgage insurance rates are calculated based on the total value of the loan. Typically, PMI will be around one percent of the loan. That total is divided into monthly payments, which you'll pay until you've paid enough on the principal that the loan is finally worth 80% or less of the home's value. You may need to pay it down to a lower threshold if you are considered a high-risk borrower, so ask your lender for additional details.

So how do I benefit from private mortgage insurance?

Without PMI, homeownership may be pushed out of your reach for a few more years as you continue to save for a down payment. Let's say you want to apply for a fixed rate mortgage on a home worth $150,000. A 20% down payment on that home is $35,000, so you can see how saving that amount of money could take some time. With PMI, you may be able to buy a home with a much smaller down payment.

Contact Citizens Bank with your PMI questions

To find out private mortgage insurance rates at Citizens Bank, feel free to reach out to one of our home loan advisors by calling 1-888-514-2300. Or, if you're ready to start your mortgage application, you can get on the road to making your dream house a reality.