Pmi Insurance: Who Needs It?

Private Mortgage Insurance (PMI) is a type of insurance that buyers are typically required to pay for a conventional loan when they make a down payment that is less than 20% of the home's purchase price. PMI is an added expense that can increase the cost of your monthly mortgage payments, making your loan more expensive. PMI is usually included in the monthly payment and can be removed once a borrower pays down enough of the mortgage's principal.

Private Mortgage Insurance (PMI) basics

Private Mortgage Insurance (PMI) is a type of insurance that compensates the lender in the event that the borrower defaults on their mortgage. It is required when the borrower takes out a conventional loan with a down payment of less than 20% of the purchase price. PMI is arranged by the lender and provided by private insurance companies. It is important to note that PMI protects the lender, not the borrower, and does not prevent foreclosure or a decrease in credit score if the borrower falls behind on mortgage payments.

PMI is typically required when the borrower takes out a conventional loan, which is a type of loan that is not federally guaranteed. If the borrower puts down less than 20% of the purchase price, they will usually be required to buy PMI. PMI may also be required when refinancing a conventional loan if the borrower's equity is less than 20% of the home's value.

The cost of PMI depends on several factors, including the size of the mortgage loan, the down payment amount, the borrower's credit score, and the type of mortgage. The average monthly cost of PMI is between 0.46% and 1.5% of the loan amount, according to the Urban Institute. This equates to a monthly payment of between $111 and $362 for a $300,000 home with a 3.5% down payment.

PMI can be paid in several ways. The most common method is to pay a monthly premium, which is added to the borrower's mortgage payment. Alternatively, some lenders may offer the option to pay the PMI cost in one upfront premium or a combination of upfront and monthly premiums.

According to the Homeowners Protection Act of 1998, lenders must cancel PMI under certain conditions. Borrowers can request to have PMI cancelled if their loan is not more than 60 days past due in mortgage payments within the last two years or 30 days past due within the last year. Additionally, there should be no subordinate liens, such as a second mortgage, and the loan-to-value (LTV) ratio should reach 80%.

If the borrower is current on their mortgage payments, PMI must be automatically cancelled once the LTV reaches 78% or when the midpoint of the amortization period is reached (e.g. 15 years on a 30-year mortgage). Borrowers can also request PMI cancellation when they have reached 20% equity in their home, but this may require an appraisal.

Avoiding PMI

There are a few ways to avoid paying PMI. One option is to put down a 20% down payment, as PMI is not required if the borrower has this amount of equity. Another option is to get a VA loan, which is guaranteed by the Department of Veterans Affairs and does not require PMI or a down payment. Additionally, some lenders offer "no-PMI mortgages" with higher interest rates, but this may not always be a more cost-effective option.

PMI costs

Private mortgage insurance (PMI) is an extra expense that conventional mortgage holders have to pay lenders each month. It typically applies to borrowers whose down payment on a home is less than 20% of the purchase price. The "private" in private mortgage insurance means it's offered by privately owned companies and not the government.

The cost of PMI depends on several factors, including the size of the loan, the down payment amount, debt-to-income ratio, credit score, loan type, and loan-to-value ratio. The larger the down payment, the less PMI will cost. Those with higher credit scores and lower debt-to-income ratios typically pay lower rates as well.

The average cost of PMI ranges from 0.2% to 2% of the loan amount per year, or $30 to $70 per month for every $100,000 borrowed. For example, if you borrow $150,000 at a PMI rate of 1%, you would pay $1,500 per year or $125 per month.

There are different ways to pay PMI: monthly, upfront at closing, or a combination of both. With monthly PMI, the premium is added to your regular mortgage payment. Upfront PMI is paid as a lump sum at closing, which can lower your monthly mortgage payment but increase your upfront costs. Split PMI involves paying a portion upfront and the remainder in monthly instalments.

PMI is not required for all types of mortgage loans. It is typically required for conventional loans with a down payment of less than 20%. FHA loans have their own type of mortgage insurance premiums, while VA loans do not require PMI or any other type of mortgage insurance.

How to avoid PMI

Private mortgage insurance (PMI) is an insurance policy that protects lenders in the event of a borrower defaulting on their loan. It is incurred if a borrower finances more than 80% of the purchase price of a home. Typically, PMI is required if a borrower makes a down payment of less than 20% of the home's cost.

• Make a 20% down payment: This is the simplest way to avoid PMI. However, it is important to maintain a cushion for furnishing and maintaining the home, as well as covering emergency expenses.
• Pay a higher interest rate for a "no PMI loan": In this scenario, the lender pays for the PMI and charges a higher interest rate on the mortgage. This is known as lender-paid mortgage insurance (LPMI).
• Get an 80-10-10 loan: Also known as a "piggyback loan", this type of loan allows you to buy a home with two loans that cover 90% of the home price. The first loan covers 80% of the home price, while the second loan covers a 10% down payment.
• Military member or veteran: If you are a current or former service member or eligible spouse, you may be eligible for a VA loan. These loans are backed by the Department of Veterans Affairs and do not require a down payment or mortgage insurance, although there is a one-time funding fee.
• Rural buyer: Consider a USDA loan if you are a lower- or moderate-income buyer in a designated rural or suburban area. These loans are backed by the U.S. Department of Agriculture and do not require a down payment or mortgage insurance, but they do come with upfront and annual fees.
• Doctor: Some lenders offer special low- or no-down-payment mortgages for physicians, dentists, and orthodontists, which typically do not require PMI.
• Check state housing finance agency programs: These agencies offer mortgage and down payment assistance programs to help first-time homebuyers. Some programs may include low-down-payment mortgages that feature reduced-cost mortgage insurance or do not require PMI.
• Explore single-premium PMI: While this doesn't eliminate PMI premiums, it allows you to avoid recurring payments by paying the entire premium at closing.
• Look at split-premium PMI: With this option, you pay a larger upfront fee to reduce your monthly payment obligations later on.
• Gifts from family: Lenders will usually allow gift money to be used for a down payment, as long as it is truly a gift and not a loan. The person giving the gift will typically need to provide a "gift letter" to affirm this.
• Purchase a less expensive home: Opting for a less costly home can make it easier to reach the 20% down payment threshold and avoid PMI.
• Buy real estate that will appreciate sharply: If your home's value increases sufficiently to lower your loan-to-value ratio (LTV) below 80%, some banks may allow you to request PMI cancellation.
• Consider refinancing: If you've had your mortgage for a few years, you may be able to refinance to a loan with a higher equity percentage, which can help eliminate the PMI requirement.

It is important to carefully consider the costs and benefits of each option before making a decision, as avoiding PMI may result in higher interest rates or additional fees.

Cancelling PMI coverage

Private mortgage insurance (PMI) is an added expense that can increase the cost of your monthly mortgage payments. It is a type of insurance that some conventional loan borrowers must pay as part of their monthly mortgage payment. It offers the owners of your mortgage some protection in the event of a default or foreclosure.

You can request PMI cancellation once your loan-to-value ratio (LTV)—the amount of your loan balance divided by the home’s market value—falls below 80% of the home’s original appraised value. This means that you own 20% equity in your home. You can also request PMI cancellation if your home’s value increases faster than anticipated, either due to market conditions or because you’ve remodelled it. In this case, you can request PMI cancellation ahead of time, and your lender will order an appraisal to confirm the home’s current value.

To cancel PMI, you’ll need to:

• Make your request in writing
• Be current on your monthly mortgage payments
• Have a positive payment history (no more than one payment that was 30 days late in a 12-month period or no more than one payment that was 60 days late in a 24-month period, according to Fannie Mae and Freddie Mac)
• Satisfy any requirement of the holder of the mortgage, which can include that the value of your property hasn’t declined below the original value of the home and you have no junior liens (such as a second mortgage)

Another way to end PMI is known as automatic PMI termination, which kicks in on the expected date that your remaining mortgage balance hits 78% LTV. By law, lenders are required to cancel PMI on certain mortgages automatically by this date. The same conditions for borrower-initiated PMI cancellation (on-time payment history and no liens) also apply here.

The final PMI termination is when a lender must automatically end PMI the month after your loan term hits its midpoint on a repayment schedule—even if you haven’t reached 78% LTV. For example, if you have a 30-year fixed loan, the midpoint would be after the 15-year mark. Again, you must be current on your payments to qualify. This type of PMI cancellation usually applies to loans with special features, such as balloon payments, an interest-only period, or principal forbearance.

PMI discontinuation rules

Private Mortgage Insurance (PMI) is typically required when homebuyers make a down payment of less than 20% of the home's purchase price. PMI is designed to protect the lender in the event of a default on the mortgage and subsequent foreclosure.

• PMI is usually included in the monthly mortgage payment.
• PMI can be removed once the borrower has paid down enough of the mortgage principal.
• The PMI discontinuation rules only apply to conventional loans.
• For conventional loans, the lender must terminate PMI when the loan balance reaches 78% of the original value of the home. This equates to the borrower having 22% equity in the home.
• The borrower can request the removal of PMI when they have amassed 20% equity in the home.
• The borrower must be current on their payments for PMI to be removed.
• The borrower must have a good payment history to be eligible for PMI removal.
• There must be no junior liens on the home, such as a second mortgage.
• The value of the property must not have declined; the borrower may need to provide evidence of this through an appraisal.
• The removal of PMI can be requested in writing to the lender or servicer.
• The lender must automatically terminate PMI at the midpoint of the loan's amortization schedule, for example, after 15 years on a 30-year loan.
• The borrower can avoid paying PMI by taking out two loans, with the second loan covering the 20% down payment. This is known as piggybacking.

Frequently asked questions