Answering Common Borrower Questions: “What is Private Mortgage Insurance?”

Understanding this cost can hopefully ease anxieties and promote better borrower education.

It’s no secret that many Americans struggle to understand how they’ll qualify for a home loan. Thank goodness for private mortgage insurance (PMI)!

Over the past 60+ years, private mortgage insurance has allowed more than 38 million borrowers to achieve the dream of homeownership via conventional loans.

But how many borrowers actually understand the concept of a private mortgage insurance policy, how it works, and why they need it? Many (50%) Americans struggle with financial literacy, and knowledge of private mortgage insurance is no exception.

This provides the perfect opportunity for mortgage professionals just like you to ease anxieties, promote borrower education, and overall help ensure your clients secure the loans they want and need for their individual situation.

So, let’s dive into some of the most common borrower questions surrounding private mortgage insurance and their comprehensive answers:

“What is Private Mortgage Insurance?”

Of course, this is probably the very first question you’ll get.

It might be a good idea to come up with a clear, simple, templatized definition you can break out for any borrower. To go above and beyond, consider a small printout or email infographic with definitions and fast facts that they can refer back to whenever needed.

Here’s a sample definition you can use:

“Private mortgage insurance (PMI) is a mortgage insurance policy that lowers risk for the lender. Basically, it ensures the lender gets paid in case you default on your mortgage loan.”

Keep in mind that most borrowers have insurance policies (health, pet, life, etc.) that benefit them. You’ll want to make it very clear that PMI benefits the lender instead and is a form of default protection.

You might also consider using this conversation as an opportunity to remind them that missed loan payments can affect their credit score, trigger late fees, and more.

“Who Needs Private Mortgage Insurance?”

Sometimes borrowers get anxious when private mortgage insurance comes up. It’s yet another cost they’ll be responsible for, and clients can understandably be emotional if they aren’t financially able to put 20% or more down.

Remember that a home is the largest purchase most people will ever make, and often a key component of the American dream. That’s why you’ll want to keep your answer to this question clear, simple, and ultimately compassionate.

A few key points to cover:

The borrower will typically need mortgage insurance if their down payment amount is less than 20%.
Many borrowers put less than 20% down and pay mortgage insurance. It’s normal and okay if the borrower falls into this category.
The borrower probably won’t have to pay for mortgage insurance forever as it is generally cancelable as you pay down the loan and/or the value of the property goes up!

“How Long Will I Have to Pay Private Mortgage Insurance?”

Naturally, this might be their next question.

Now you’ll need to dive into loan-to-value ratios. Remember that industry jargon and acronyms can quickly confuse the average consumer, so keep your answer clear and concise.

Here’s a sample script you can use:

“As you build up your home equity, borrowers usually reach a point where they no longer need to pay private mortgage insurance. This typically happens when your home’s loan-to-value ratio reaches 80%.

The loan-to-value, or LTV, ratio is a comparison between the amount of money owed on the loan and the current value of the collateral (your home). You can determine your loan-to-value ratio by dividing your mortgage amount by the appraised property value of the home.”

At this point, you can go above and beyond by pulling out a pen and paper to run some numbers with them. Imagine a future appraised property value and use that to determine potential LTV ratios. This way, the borrower can better imagine how and when theymay be able to drop PMI.

“How Much Does Private Mortgage Insurance Cost?”

As you know, the answer to this question will depend entirely on the borrower, their financial situation, their lender, and their potential loan amount.

If you have all of these figures firmed up, you should be able to give them a solid number. If not, it’s probably not a good idea to guess. The borrower might cling to the figure provided, and then be shocked if the real number is higher.

Either way, do your best to provide a helpful, personalized answer. If that answer happens to be, “I’m not sure, let’s wait and see,” no problem.