Let’s talk about private mortgage insurance, or PMI

Buying a home for the first time can put you on a steep learning curve. It’s easy to get lost in the jargon bandied about by real estate professionals and mortgage bankers. It sometimes seems there’s an endless list of terms to get to know, many of them reduced to an acronym.

Key among those acronyms is PMI. It stands for private mortgage insurance. PMI is intended to insure the bank against the risk that the buyer will default on a loan. If you put down 20 percent or more for a conventional loan — that is, when the loan-tovalue (LTV) ratio is at least 80 percent, you will not have to pay PMI.

“Anytime you don’t have 20 percent down, the bank sees it as a risk,” says Tuan Vo, managing senior broker

at Providential Mortgage in Fremont. “They are concerned that the client will walk away from the house.”

In the Bay Area, where the average home price in some municipalities is $1,000,000 or more, however, the 20 percent down payment may not always be within reach, especially for younger buyers.

According to industry experts, PMI can amount to 0.3 percent to nearly 1.5 percent of the original loan amount each year. Naturally, the percentage depends upon the bank’s perception of risk. Other than the size of your down payment, the bank considers your credit score as a factor. A higher credit score will contribute to a lower PMI premium.

The lender will also take into account whether the property is likely to rise in value over time. While

home values in the Bay Area have skyrocketed, there is no knowing when they will peak.

Even the type of mortgage is considered: Generally, you’ll pay more in PMI for an adjustable-rate mortgage (ARM) than for a fixed-rate mortgage.

The good news is you can cancel PMI once the loan-to-value ratio rises to 80 percent. If your property’s value rises, you may be able to cancel PMI sooner rather than later. When the LTV reaches

78 percent, the lender is required to cancel the insurance.

In a market where you’re lucky to find a home for $1 million, PMI can really add up. Say you put down 10 percent and take out a mortgage for $900,000. You have a pretty good credit score, so the bank gives you a .5 percent per year rate. You’ll be paying $4,500 for PMI each year, at least until your loan-tovalue ratio is equal to 80 percent. It’s easy to see

why buyers often prefer to avoid this expense. (You will not be able to avoid PMI if you take out an FHA loan.)

You can pay PMI upfront at closing or have it folded into your monthly mortgage payment, according to the U.S. Consumer Financial Protection Bureau. You can also pay part of it upfront and have the rest folded into your monthly amount. Your decision may depend on how long you plan to stay in your

home. PMI paid upfront is not refundable, so if you refinance or move, you will just have to take the loss.

Many buyers feel private mortgage insurance is absolutely to be avoided. But with real estate values at all-time highs, you may not be able to sidestep it altogether. A thorough analysis of your financial situation, available mortgage interest rates and new home’s value, at minimum, should inform the evaluation.