Orlando Harmon
Private mortgage insurance (PMI) is a type of insurance that is typically required when a borrower takes out a mortgage with a down payment of less than 20%protects the lender in case the borrower defaults on their loan. The cost of PMI varies depending on factors such as the loan term, loan amount, and down payment. While PMI can be cancelled once the loan balance reaches 80% of the original value of the home, there are ways to get rid of it earlier, such as by refinancing, getting a reappraisal, or paying down the mortgage faster. For FHA loans, a different type of insurance called Mortgage Insurance Premium (MIP) is typically required, which may need to be paid for the life of the loan unless certain conditions are met.
| Characteristics | Values |
|---|---|
| Type of mortgage insurance | Private Mortgage Insurance (PMI) |
| When can you remove PMI? | When the mortgage's loan-to-value (LTV) ratio reaches 78% of the home's purchase price, or the month after you reach the loan term's midpoint (e.g. 15 years on a 30-year loan) |
| How to remove PMI | Request cancellation when the principal balance of the mortgage is 80% of the original value of the home, be current on monthly payments, ensure no other liens on the home, and get a home appraisal |
| Exceptions | For FHA loans, the mortgage insurance premium (MIP) may need to be paid for the life of the loan unless specific conditions are met, such as refinancing or reaching a certain percentage of the loan's value |
| Other options to remove PMI | Refinancing, getting a reappraisal, or paying down the mortgage faster |
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What You'll Learn
Private mortgage insurance (PMI)
The cost of PMI depends on several factors, including the size of the loan, the down payment amount, and the borrower's credit score. Generally, a higher credit score results in a lower PMI rate. The average annual cost of PMI is between $30 and $70 per $100,000 borrowed. It is usually paid monthly as part of the mortgage payment, but it can also be paid upfront or through a combination of upfront and monthly payments.
PMI can be removed or cancelled under certain conditions. One way to remove PMI is to build up at least 20% equity in your home. Additionally, PMI is automatically cancelled when the loan-to-value (LTV) ratio reaches 78% or the month after the midpoint of the loan term is reached, which is usually after 15 years for a 30-year loan. Borrowers can request PMI cancellation when their mortgage balance reaches 80% of the home's value, provided they are current on their payments and meet other requirements.
It is important to note that PMI protects the lender and does not prevent foreclosure or negative impacts on the borrower's credit score in case of missed payments. While it increases the cost of the loan, PMI enables borrowers to qualify for loans they might not otherwise be able to obtain.
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Mortgage insurance premium (MIP)
MIP is paid by homeowners who take out loans backed by the FHA. FHA-backed lenders use MIPs to protect themselves against higher-risk borrowers who are more likely to default on loans. Since FHA loans come with a down payment as low as 3.5% and a credit score as low as 580, default is a key concern.
MIP has an upfront premium paid at closing or built into the loan amount, ranging from 0.01% to 1.75% of the loan amount. There are also annual premiums paid on a monthly basis, ranging from 0.15% to 0.75% of the loan amount, depending on factors such as the loan term, loan amount, and down payment or amount of equity.
For FHA loans originated between December 31, 2000, and June 3, 2013, if you have paid off at least 78% of the loan-to-value amount, you may ask the lender to cancel the MIP. For loans originated after June 3, 2013, if you made a down payment of less than 10% of the home's value at loan origination, you must pay the MIP for the life of the loan. The only way to remove the MIP on an FHA loan is to refinance it into a non-FHA product.
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Removing PMI ahead of schedule
Private mortgage insurance (PMI) is a policy you must buy if you put less than 20% down on your home with a conventional mortgage. It protects your lender in case you default on your mortgage, and you typically pay premiums as part of your monthly mortgage payment. The good news is that PMI doesn't last forever. Here are some ways to remove PMI ahead of schedule:
Refinancing
Refinancing your mortgage can be a way to get rid of PMI. However, refinancing costs money, so it usually only makes sense if you can lower your interest rate. If you've built up at least 20% equity in your home, you may be able to refinance to a new loan without PMI.
Reappraisal
If your home's value has increased due to market appreciation or renovations, you may be able to request a PMI cancellation by getting a reappraisal. A higher valuation may help you reach the 20% equity level sooner, which is the threshold for PMI removal. Keep in mind that an appraisal usually costs a few hundred dollars, depending on your location and property characteristics.
Paying Down Your Mortgage Faster
You can also try to pay down your mortgage faster to reach the 20% equity threshold sooner. This can be done by making extra payments towards your principal balance or paying one lump sum towards your loan. However, be sure to check with your lender or servicer to ensure that any extra payments go towards the loan's principal and not towards your next payment or interest.
Automatic Cancellation
According to the Homeowners Protection Act of 1998 (HPA), mortgage lenders or servicers are required to automatically cancel PMI when the mortgage's loan-to-value (LTV) ratio reaches 78% of the home's purchase price or the month after you reach the midpoint of your loan's term, such as 15 years on a 30-year loan. This automatic cancellation is legally required as long as you are current on your monthly payments.
Written Request for Cancellation
If you want to cancel PMI before it is automatically terminated, you can submit a written request to your mortgage servicer. You can legally make this request when your principal balance is scheduled to fall to 80% of the original value of your home. This request can be made ahead of schedule if you have made additional payments that reduce the principal balance to 80% of the original value.
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Cancelling PMI
Wait for automatic cancellation
The Homeowners Protection Act of 1998 (HPA) requires mortgage lenders or servicers to automatically cancel PMI when the loan-to-value (LTV) ratio reaches 78% of the home's purchase price, or the month after the midpoint of the loan's term. For a 30-year loan, this midpoint is typically reached after 15 years.
Request early cancellation
You can request to cancel PMI when your mortgage balance reaches 80% of the original value of your home. This can be done by making additional payments to reduce the principal balance. However, you must ensure that you are current on your monthly payments and have a good payment history.
Refinance your mortgage
Refinancing your mortgage can be an option to get rid of PMI. With rising home values, refinancing may help you access the equity needed to avoid PMI. Additionally, if you have an FHA loan, refinancing to a conventional loan can eliminate the need for mortgage insurance premiums (MIP).
Reappraise your home
Getting a home appraisal to confirm that your home's value has not decreased can be a step towards cancelling PMI. This option may require a valuation or appraisal to ensure the home meets the lender's expectations.
Build equity in your home
Achieving at least 20% equity in your home can help remove the need for PMI. This can be accelerated by paying extra towards your principal balance or making biweekly payments.
It is important to note that the conditions for cancelling PMI may vary depending on the lender and the type of loan. It is always a good idea to consult with your lender or servicer to understand their specific requirements and guidelines for cancelling PMI.
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How much is PMI?
Private Mortgage Insurance (PMI) is a type of insurance that you must purchase if you put down less than 20% when buying a home with a conventional mortgage. It protects the lender in the event that you default on your mortgage, and you typically pay premiums as part of your monthly mortgage payment. The cost of PMI varies depending on several factors, including your credit score, debt-to-income ratio, loan-to-value ratio, loan term, loan amount, and down payment amount.
For example, let's consider a $300,000 mortgage. According to NerdWallet, the PMI on this mortgage could range from $1,380 to $4,500 per year, or $115 to $375 per month. This range takes into account different factors, such as credit score and down payment amount. A lower credit score and a smaller down payment would typically result in a higher PMI rate.
There are ways to get rid of PMI before reaching the midpoint of your loan term. You can request PMI cancellation when your mortgage balance reaches 80% of the original value of your home, as long as you are current on your monthly payments. Additionally, you can build up equity in your home to at least 20% and then contact your servicer to initiate the process of removing PMI.
It's important to note that PMI is different from Mortgage Insurance Premium (MIP), which is associated with FHA loans. MIP has upfront premiums paid at closing or built into the loan amount, as well as annual premiums ranging from 0.15% to 0.75% of the loan amount.
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Frequently asked questions
Mortgage insurance, also known as Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP), is a policy that you must buy to protect your lender in the event that you default on your mortgage.
Mortgage insurance is added to your monthly mortgage payment as a premium. It is usually required if you buy a home with less than a 20% down payment.
You can stop paying for mortgage insurance once your loan is paid down to 78-80% of the home's original value. This can be achieved by making additional payments, refinancing, or getting a reappraisal.
