If you are making a down payment of less than 20% on a home, it's essential to understand your options for private mortgage insurance (PMI). Some people simply cannot afford a down payment in the amount of 20%.
Others may elect to put down a smaller down payment in favor of having more cash on hand for repairs, remodeling, furnishings, and emergencies.
The most common type of PMI is borrower-paid mortgage insurance (BPMI). BPMI comes in the form of an additional monthly fee that you pay with your mortgage payment. After your loan closes, you pay BPMI every month until you have 22% equity in your home (based on the original purchase price).
With single-premium mortgage insurance (SPMI), also called single-payment mortgage insurance, you pay mortgage insurance upfront in a lump sum. That can be done either in full at closing or financed into the mortgage (in the latter case, it may be called single-financed mortgage insurance).
With lender-paid mortgage insurance (LPMI), your lender will technically pay the mortgage insurance premium. In fact, you will actually pay for it over the life of the loan in the form of a slightly higher interest rate.
Unlike BPMI, you can't cancel LPMI when your equity reaches 78% because it is built into the loan. Refinancing will be the only way to lower your monthly payment. Your interest rate will not decrease once you have 20% or 22% equity. Lender-paid PMI is not refundable.
Split-premium mortgage insurance is the least common type. It’s a hybrid of the first two types we discussed: BPMI and SPMI.
Here’s how it works: You pay part of the mortgage insurance as a lump sum at closing and part monthly. You don’t have to come up with as much extra cash upfront as you would with SPMI, nor do you increase your monthly payment by as much as you would with BPMI.