Alyssa Lane
Private mortgage insurance (PMI) is a type of insurance that is required for conventional loans when the buyer makes a down payment of less than 20% of the home's value. It is an additional monthly cost that is added to the mortgage payment and protects the lender if the buyer defaults on their loan. The cost of PMI varies depending on factors such as the loan term, loan amount, down payment, and credit score. While PMI can provide peace of mind for lenders, it also benefits buyers as it allows them to purchase a home with a lower down payment. In terms of removing PMI, there are a few options. For conventional loans, PMI can be removed once the loan balance reaches 78-80% of the original value of the home, or when the loan reaches the midpoint of its amortization schedule. For FHA loans, PMI may be removed after 11 years if the buyer has made a down payment of at least 10%. Therefore, while PMI may not drop off automatically after 5 years, there are options to remove it earlier depending on the specific circumstances.
| Characteristics | Values |
|---|---|
| Removal of PMI | PMI can be removed when the loan balance is below 80% of the purchase price of the home or when 20% equity is achieved. |
| Automatic removal of PMI | PMI is automatically removed when the loan balance reaches 78% of the original value of the home. |
| Removal before 2 years | PMI can be removed before 2 years if there is proof of "substantial improvements to the home". |
| FHA loans | For FHA loans, MIP comes off after 11 years if a down payment or 10% or more in equity is made. |
| Cost of PMI | The average PMI payment ranges from $30 to $70 per month for every $100,000 borrowed. |
| Multi-unit properties | For multi-unit properties or rentals, mortgage insurance is automatically cancelled halfway through the loan term. |
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What You'll Learn
Private mortgage insurance (PMI)
PMI is required for borrowers who obtain a conventional mortgage with a down payment of less than 20%. It is also required for FHA loans, where it is called a mortgage insurance premium (MIP). PMI can be paid in a few ways: BPMI, where a monthly fee is added to the mortgage payment; LPMI, where the lender pays the insurance premiums in exchange for a higher interest rate; split-premium PMI, where part of the insurance payment is made upfront at closing; and single-premium PMI, where a lump sum is paid at closing to keep the lowest rate possible and avoid monthly fees.
PMI can be cancelled once the borrower has built up the required amount of equity in their home. Federal law dictates that the lender must automatically end PMI when the loan-to-value (LTV) ratio drops to 78% or when the midpoint of the loan term is passed. For 30-year loans, the midpoint is after 15 years. The borrower can request to cancel PMI when the mortgage balance reaches 80% of the home's value. If the borrower has made additional payments that reduce the principal balance to 80% of the original value of the home, they can ask to cancel PMI ahead of the scheduled date.
PMI cancellation guidelines are created by loan investors, including Fannie Mae and Freddie Mac. For multiunit properties or rentals with a Fannie Mae mortgage, PMI is automatically cancelled halfway through the loan term. If the loan is owned by Freddie Mac, there is no automatic cancellation, and the borrower must show 35% equity to cancel PMI.
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Mortgage insurance premiums (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 comes with an upfront premium paid at closing or built into 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 your loan term, loan amount, and your down payment or amount of equity. For FHA Streamline loans closed before May 31, 2009, the upfront MIP is 0.01% of the loan amount and the annual MIP is 0.55%.
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 qualified mortgage insurance (MIP) on an FHA loan is to refinance it into a non-FHA product.
Borrowers who qualify for a conventional loan, even if they pay PMI, should also consider FHA loans to determine which is the better deal. Those with lower credit scores may do better with an FHA mortgage, particularly if they can make a 10% down payment. Additionally, if you take out an FHA loan and put down at least 10%, you'll only pay MIP for 11 years.
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How to calculate PMI
Private mortgage insurance, or PMI, is a type of home loan insurance that you're typically required to pay if you take out a conventional mortgage and put down less than 20%. The cost of PMI varies depending on factors such as your credit score, debt-to-income ratio, and loan-to-value ratio (LTV).
Step 1: Identify the Property Value
Get the exact figure from a recent appraisal or use an estimate of how much you plan to offer for the house.
Step 2: Find the Total Loan Amount
For a new mortgage, subtract your down payment from the home price. If you are refinancing, start with your current mortgage balance.
Step 3: Calculate the LTV
Divide the loan amount by the property value, then multiply by 100 to get the percentage. If the result is 80% or lower, you likely don't need to pay PMI.
Step 4: Get the PMI Percentage
Ask your lender for the specific PMI percentage or use a range provided by them.
Step 5: Estimate Your Annual PMI Premium
Take the PMI percentage provided by your lender and multiply it by the total loan amount. This will give you an estimate of your annual PMI cost.
Step 6: Calculate Your Monthly PMI Cost
To get your monthly PMI cost, divide your estimated annual PMI premium by 12.
It's important to note that online PMI calculators can be very helpful in estimating your PMI costs. These calculators take into account factors such as the home price, down payment, interest rate, and credit score to provide a more accurate estimate. Additionally, building your credit score, paying off debts, and making a larger down payment can help reduce your PMI costs.
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Cancelling PMI
Private Mortgage Insurance (PMI) is an additional fee added to your mortgage payment that provides lenders with peace of mind in case you default on your loan. While it is not a bad idea to save as much as possible for a down payment, it is not always feasible for buyers. If you are getting a conventional loan, you can put down as little as 3% but will have to pay PMI.
The good news is that you do not have to pay PMI forever. There are several ways to get rid of PMI. The first is to simply wait for your lender to automatically cancel it. Federal law requires mortgage lenders to automatically cancel PMI when the balance of the mortgage drops to 78% of the home's purchase price or when the loan term reaches its halfway point, whichever comes first. For a 30-year loan, this midpoint is after 15 years.
If you do not want to wait, you can request that your lender cancels PMI sooner. You can do this when your mortgage balance reaches 80% of your home's purchase price. To estimate this amount, multiply your home's purchase price by 0.8. You can reach this amount sooner by paying extra towards your principal. You can do this by making biweekly payments or an additional payment each year, or by paying a lump sum.
If you have owned your home for at least two years, your remaining mortgage balance must be no greater than 75% to cancel PMI. If you have owned it for at least five years and your loan balance is no more than 80% of the new valuation, you can also request PMI cancellation. In this case, you will need to pay for a new appraisal.
Another option is to refinance your mortgage. With today's high home values, you may have the equity you need to refinance and avoid paying PMI. You can also refinance from an FHA to a conventional loan to eliminate your Mortgage Insurance Premium (MIP).
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PMI and FHA loans
PMI, or private mortgage insurance, is a type of insurance that applies to conventional loans. It provides a payment for part of the outstanding loan amount if a borrower defaults on their loan. It is paid by the borrower through a monthly fee added to their mortgage payment.
FHA loans are different from conventional loans and have different insurance requirements. FHA loans require a minimum down payment of 3.5% and do not require PMI. Instead, they require an upfront mortgage insurance premium (UFMIP) and a mortgage insurance premium (MIP) to be paid. The upfront premium is typically 1.75% of the base loan amount, paid at closing or added to the loan amount. The annual premiums range from 0.15% to 0.75% of the loan amount, depending on factors such as the loan term, loan amount, and down payment.
MIP on FHA loans used to be cancellable once the loan-to-value ratio reached a certain point, but changes in FHA regulations have eliminated this option. Today, FHA borrowers will typically need to pay MIP for either 11 years or the lifetime of the mortgage, depending on the down payment. If you put at least 10% down, you will pay MIP for 11 years. With a down payment of less than 10%, you will pay MIP for the entire life of the loan.
One way to stop paying MIP on an FHA loan is to refinance and convert it into a conventional loan. However, conventional loans have stricter requirements, and you will need to have at least 20% equity in your home to refinance from an FHA loan to a conventional one. You will also need to meet other requirements, such as a median FICO® Score of at least 620 and a debt-to-income ratio of 50% or less.
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Frequently asked questions
Private Mortgage Insurance (PMI) is an additional monthly cost that’s rolled into your mortgage payment. It protects the lender if the buyer stops making loan payments. The cost of PMI is typically between 0.58% and 1.86% annually.
You can request cancellation of PMI once you've built up the required amount of equity in your home. The exact requirements for removing PMI vary depending on the type of property and the type of loan. For example, for a single-unit home with a conventional loan, you can request cancellation when your mortgage balance reaches 80% of the home's purchase price. For FHA loans, you'll need to have made a down payment or have existing equity of 10% or more for the MIP to come off after 11 years.
Yes, federal law requires mortgage lenders to automatically cancel PMI when the balance of the mortgage drops to 78% of the home’s purchase price, or halfway through the loan term, whichever comes first.
