This blog post was published by Jean Chatzky, with reporting by Casandra Andrews, both from SavvyMoney and commenting by Wendy Hoekstra, Vice President – Retail Lending from First Community Bank and Trust.

Understanding Private Mortgage Insurance in the U.S.

Plan ahead: Thinking of buying a home in the next few years? Set up a meeting with Wendy Hoekstra, Vice President – Retail Lending at First Community Bank and Trust to get an idea of how much you’ll need to save to qualify for a mortgage.

What is Mortgage Insurance?

Mortgage insurance, sometimes called Private Mortgage Insurance, or PMI for short, may not be what you think it is, or cover what you think it should. If you are in the market to buy a new home, or maybe in the next few years, it’s good to know how this form of protection could potentially impact your ability to get a loan and how much your monthly loan payments may be.

Mortgage insurance is typically required by lenders when a home buyer is not able to put down 20% of the purchase price of the home. Designed to protect the lender, not the buyer, its roots date back more than 140 years, when financial institutions began loaning money to borrowers in the United States in the 1880s. Bottom line, mortgage insurance is the amount of money you may be required to pay each month in addition to your mortgage payment.

How Does Mortgage Insurance Work?

A lender usually arranges for PMI as part of a loan application, when needed, and is provided by a private insurance company. That means you don’t have to go out and find a separate financial institution to provide this coverage.

Why it Matters

With interest rates still high and home prices elevated in markets across much of the U.S., the portion of your income needed to repay a loan matters more now than ever.

Advocates say PMI is a way to help those who might not otherwise be able to save the money needed for a 20% down payment to realize the dream of homeownership. U.S. Mortgage Insurers, a trade group that advocates for mortgage insurance companies, tracks how many Americans are impacted annually by private mortgage insurance.

According to its data, nearly 800,000 home buyers were able to purchase a home with the use of private mortgage insurance. Among that group:

• Nearly 63% were first-time homebuyers
• Almost 35% had incomes below $75,000
• The average loan amount with mortgage insurance was $345,000

Here’s a quick reference guide to highlight the top three things you need to know about how mortgage insurance impacts those who utilize it:

1. Mortgage Insurance Doesn’t Protect You. As we mentioned previously, the person receiving the home loan from a lender is responsible for covering the additional cost of mortgage insurance even though it doesn’t protect them if they can’t make the loan payments. In addition to PMI, lenders require buyers to purchase a separate homeowner’s insurance policy to protect the property, according to the Consumer Finance Protection Bureau.

2. PMI When Refinancing May Be Required. There’s even more fine print you should be aware of when it comes to private mortgage insurance and refinancing a current loan. The CFPB notes that PMI can also be required when refinancing a conventional loan if your equity is less than 20% of your home’s value.

3. You Can Cancel PMI. There’s some good news here. Private mortgage insurance usually doesn’t last forever. Thankfully, homeowners have the option of asking their lender to drop the PMI when the balance falls to 80% of the original value of a home. (If, of course, you have made all of your payments on time, among other requirements.)

Even better: If you make extra payments to lower the principal balance of your mortgage to 80% of the original value of your home, you can ask to have the PMI canceled earlier. Early termination of PMI requires approval from the lender.

 

About First Community Bank and Trust
First Community Bank and Trust is a privately-owned bank. Established in 1916 First Community Bank and Trust has been serving Beecher, IL, Peotone, IL and the surrounding communities for over 109 years. Our commitment to providing the best banking products and services is matched only by our outstanding customer service. We offer traditional community banking services, including mortgage, consumer, and commercial lending, as well as state of the art electronic banking services.

Press Contact:
Steve Koehn, Senior Vice President
First Community Bank and Trust
(708) 946-2246

 

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