Conventional Loans and Private Mortgage Insurance (PMI)

On most conventional loans originated in the United States with less than a 20% down payment, the borrower is required to pay mortgage insurance in one for or another.  The mortgage insurance is designed to protect the lender from the borrower foreclosure and loss of money in the resulting process.

Furthermore, private mortgage insurance offers home buyers the advantage of buying a home sooner and in some cases for a larger purchase price than they would normally be able to do.  Since mortgage insurance reduces the lender's exposure for loans greater than 80% of the property's value, mortgage lenders are able to offer more and a greater variety of financing options for home buyers such as zero and 3% down mortgages.

Fortunately, mortgage insurance is not an expense that he/she will have to pay forever.  Since Congress passed the Homeowner's Protection Act of 1997, any loan originated on or after July 29, 1999 will have the mortgage insurance automatically cancelled once the outstanding principal balance reaches 78% of the original purchase price.

For those whose loans were written before July 29, 1999, the Federal National Mortgage Association (FNMA, also known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, also known as Freddie Mac) have instituted policies that automatically cancel mortgage insurance once a loan is halfway through its term.  In other words, once a 30 year loan reaches the fifteenth year, the mortgage insurance would be cancelled.

The amount of mortgage insurance charged to a home owner will vary.  The larger the down payment, the less the mortgage insurance.  Also if the loan presents less risk, the less the mortgage insurance.  A 15 year loan (where the loan is repaid quicker by the borrower) has less risk and subsequently lower mortgage insurance payments than an equivalent 1 year adjustable rate mortgage (where the mortgage payment may fluctuate higher each year).

The following table illustrates common mortgage insurance percentages for common conventional mortgages: