Know about Escrow, PMI, and Homeowners Insurance

What You Need to Know about Escrow, PMI, and Homeowners Insurance

If you are looking to purchase a home, you are bound to come across mortgage-related terminologies like PMI, homeowners insurance, and escrow. Let’s examine these three terms to understand what they mean.

Personal Mortgage Insurance (PMI)

A mortgage is one of the most popular ways of financing a home because it is less demanding than a full upfront payment. However, you are required to make some initial payments towards the purchase. Depending on how much you are willing to put as a down payment, you may be required to carry personal mortgage insurance. PMI is often used as a synonym for homeowners insurance, but there are differences between the two.

What Is PMI?

Personal mortgage insurance is a periodic payment, usually monthly, for coverage of your home. This coverage protects the interest of the lender should you default in repaying your loan. It is a mandatory coverage requirement. The amount to be paid monthly depends on your lender and the down payment on the house. You may be exempted from purchasing this policy in rare instances, such as if you pay up to 20% of your mortgage as a down payment to the lender.

Homeowners Insurance

Homeowners insurance is the financial coverage for your home in the event of unforeseen damages. Your home is one of your most important assets, so it must be protected at all times. Several incidences can cause significant damage to your home, including fire, storm, and burglary. Homeowners’ insurance helps protect against emergencies to avoid or minimize out-of-pocket costs.

PMI Vs. Homeowners Insurance

Homeowners’ insurance protects the interests of the borrower and lender by covering the building and paying for the repair or replacement costs of the contents of the home should any damage occur. PMI, on the other hand, protects only the interests of the lender against a defaulting borrower.

What Is Escrow?

Escrow is an essential element of a mortgage transaction. It is an arrangement where the parties to a mortgage transaction involve a third party to hold money and property until all the terms of the contract have been met. Here, payments will be made periodically and held by a third party until the full sum is paid and the parties are ready to finalize the sale.

After closing the sale transaction, payment may still be made to an escrow to help oversee the management of the PMI, homeowners insurance, and annual property taxes. You have the right to choose other options to manage these charges.


Refinancing your PMI can help reduce the rates of an existing loan, making it a more affordable option. If the mortgage rate drops to significantly low rates, refinancing may be the best option. Also, if you have a good credit score and the value of your home has risen over time, you stand to gain up to 20% equity by refinancing. Careful evaluation of the market will help you decide whether dropping your PMI will cost you substantially less than what you’re currently paying.

Andraya Coulter can help you with your home loans and at affordable rates. Contact us today to get started!


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