What to know about Private Mortgage Insurance (PMI)
If you buy a home with a down payment of less than 20 percent, you’ll probably have to purchase some form of mortgage insurance. Private Mortgage Insurance or “PMI” is required for conventional (non-government) loans exceeding 80 percent loan-to-value (LTV). Government-backed loans like FHA, VA and USDA mortgages have their own insurance programs.
What is PMI?
PMI makes down-payments of less than 20% possible for borrowers. PMI is an added premium you'll need to pay on top of your monthly mortgage payment if you put less than 20% down. The insurance protects the lender in the event that you are unable to pay your loan. The monthly premium that you pay goes to the insurer, and if you default on your home loan, the coverage will pay a portion of the balance due to the mortgage lender.
Should I get PMI?
Homeowners are often advised to avoid PMI because it is an avoidable extra cost associated with buying a home. Sometimes paying PMI is the right move because it can help you get into a home that would otherwise be out of reach because you won’t have to put 20% down.
How do I avoid PMI?
The easiest way to avoid paying PMI is by putting down at least 20% on a home loan. In addition to avoiding PMI, a large down payment also gives you stronger financial footing and may allow you to borrow less and/or qualify for more affordable loan terms.
Paying PMI isn’t necessarily a bad thing if you can easily afford it. But if PMI would strain your budget or cause you to spend significantly more on a home than you’d like, it’s a good idea to avoid it.
How much does PMI cost?
The cost of private mortgage insurance ranges depending on how much money you actually put down on the loan, and your credit score. PMI is calculated as a percentage of your total loan amount. The larger your loan, the more PMI you will end up paying.
The cost of PMI is also influenced by your down payment. PMI takes into account the loan-to-value ratio (LTV) or how much you’re borrowing in comparison to the total value of the property. The lower your LTV, the less you put down on your loan, the higher the risk for the lender. That’s why the cost of PMI often increases as your LTV decreases.
Secondly, your credit score can influence the cost of PMI. The higher your score, the less risk you represent to lenders, so it may be possible to qualify for lower PMI with good credit.
How do I pay PMI?
PMI is arranged by the lender through their own insurance providers. The cost and length of the plan will be provided to you at closing.
You can choose to pay the premium up-front as part of your closing costs, and then annually until you’re no longer required to pay it. Alternatively, you can roll the premium into your loan and make monthly payments on top of your regular loan payments. Keep in mind that if you split up the payments, however, you’ll pay interest on them, too. This can cause PMI to be much more expensive than you realize.
How do I stop paying PMI?
To stop paying PMI, the mortgage balance must fall to 80% of the home's value. This can happen in two ways.
First, you can make payments until you have 20% equity in your home—or an LTV of 80%—at which point you can contact your lender to inquire about removing PMI. Factors that play into this decision for the lender include loan status and payment history. The lender may require a Broker Price Opinion (or BPO) at your expense to confirm LTV of your property.
Second, your home value could increase to the point that you now have enough equity built up to remove PMI. In this situation, your loan would need to be at least two years from the closing date to be eligible. You would then need to reach out to your lender to inquire about cancelling your PMI. The same factors as mentioned above apply here as well except that the lender is required to order a BPO at your expense to determine the new LTV of your property.
- NOTE: If you are 2-5 years into your loan, the new value would have to bring the LTV to 75% or below. If the loan is over five years old, then the LTV would have to be 80% or below.
Does PMI ever get automatically terminated?
There are two more ways to have PMI removed.
First, your servicer is required to automatically terminate PMI from your loan on the date that the principal balance is first scheduled to reach 78% of the original value based solely on the initial amortization schedule. Your loan must be current on the date of termination for the servicer to proceed with removal, otherwise, it will be removed on the first day of the month following the date you become current.
- NOTE: The automatic termination of PMI cannot be moved forward based on payments made to Principal. The date is determined when the loan is closed based on the initial amortization schedule.
Second, if your PMI has not been cancelled at the borrower’s request or by the automatic termination process, the servicer must terminate PMI coverage by the first day following the date that is the midpoint of the loan’s amortization schedule. The loan must be current on the date of termination for the servicer to proceed with removal, otherwise, it will be removed on the first day of the month following the date you become current.
What is LPMI?
Lender Paid Mortgage Insurance (LPMI) involves a higher interest rate built into the loan. That rate never drops, even after your loan balance falls to less than 80 percent of the purchase price. With LPMI, lenders may choose to assume the extra risk that goes with a mortgage with a low down payment by charging you a higher interest rate. Alternatively, lenders may purchase a single-premium mortgage insurance policy on your behalf and charge you a higher rate to cover the cost.
Either way, your principal and interest payment is higher than it would be without LPMI. But you won’t be paying monthly mortgage insurance premiums, so your total payment may be cheaper.
LPMI may be a better option over PMI for two reasons:
The extra mortgage interest LPMI lenders charge is often less than a comparable monthly mortgage insurance premium.
Your monthly payment may be more affordable because the cost of the PMI is spread out over the entire loan term.
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