Haris Ashley
Private mortgage insurance (PMI) is an extra expense for borrowers who make a down payment of less than 20% of the home's value. It is arranged by the lender and provided by private insurance companies, protecting the lender in the event of a loan default. The most common way to pay for PMI is through a monthly premium added to your mortgage payment, although some lenders allow upfront or a combination of upfront and monthly payments. The cost of PMI depends on several factors, including the size of the loan, the down payment amount, and the credit score. It is important to understand how PMI impacts your monthly mortgage costs and when you can remove the additional charge.
| Characteristics | Values |
|---|---|
| Full Form | PMI (Private Mortgage Insurance) |
| Who arranges it? | The lender |
| Who provides it? | Private insurance companies |
| Who does it protect? | The lender |
| Who pays for it? | The borrower |
| When is it required? | When the down payment is less than 20% |
| How much does it cost? | Depends on the loan, down payment size, credit score, debt-to-income ratio, and loan-to-value ratio |
| How is it paid? | Monthly premium, one-time upfront premium, or a combination of both |
| Can it be avoided? | Yes, by considering lender-paid mortgage insurance or special first-time home buyer loans without PMI |
| Can it be cancelled? | Yes, when the loan balance is below 80% of the purchase price or when 20% equity is achieved |
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What You'll Learn
Private mortgage insurance (PMI) rates
Private mortgage insurance (PMI) is an additional expense for borrowers who take out a conventional mortgage with a down payment of less than 20%. The purpose of PMI is to protect the lender in case the borrower defaults on the loan. The amount of PMI you'll pay depends on several factors, including the size of your loan, the size of your down payment, your credit score, and your debt-to-income ratio. Generally, the higher your credit score and the larger your down payment, the lower your PMI rate will be.
There are two main types of PMI: borrower-paid PMI and lender-paid PMI. With borrower-paid PMI, you make monthly payments toward the insurance premium in addition to your regular mortgage payments. You can typically request to cancel borrower-paid PMI when you reach 20% equity in your home. With lender-paid PMI, the lender pays the insurance premium upfront, and you repay them with a higher interest rate on your mortgage. Lender-paid PMI cannot be cancelled in the same way as borrower-paid PMI and may require refinancing to get out of it.
The cost of PMI is typically between 0.2% and 2% of the original loan amount per year. For example, if you have a $300,000 mortgage, you can expect to pay between $600 and $6,000 per year in PMI. This amounts to between $50 and $500 per month. However, the actual cost of PMI can vary depending on various factors, so it's recommended to use a PMI calculator to get an estimate specific to your situation.
There are a few ways to avoid or cancel PMI. One way is to take out a piggyback loan, which is a second mortgage that helps you avoid PMI by increasing your down payment. However, this option comes with additional risks and costs. Another way to avoid PMI is to refinance your home and qualify for a conventional mortgage without PMI. You can also request your lender to cancel PMI when you reach 20% equity in your home, or wait for automatic cancellation when you've paid off 22% of your home's original value or reached the halfway point of your loan term.
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PMI payment options
Private mortgage insurance (PMI) is a type of mortgage insurance that you may be required to purchase if you take out a conventional loan with a down payment of less than 20% of the purchase price. PMI rates vary by down payment amount and credit score. While PMI protects the lender if you stop making payments on your loan, it does not protect you, and you can still lose your home through foreclosure.
There are several PMI payment options available, depending on your lender and financial situation:
Monthly Premium
The most common way to pay for PMI is through a monthly premium. The premium amount is based on a percentage of your loan balance and is added to your monthly payment. This option keeps a chunk of your cash savings intact for future maintenance, repairs, or emergencies.
Single Premium
Also known as "upfront PMI," this option allows you to pay the entire premium in one lump sum at the closing of your mortgage. While this option may result in a lower monthly mortgage payment, it requires a significant amount of cash upfront and could clean out your bank account, depending on the premium amount.
Split Premium
This option combines the monthly and single premium options. You pay a portion of the PMI upfront at closing, and the remaining premium amount is added to your monthly mortgage payments.
Lender-Paid PMI
With lender-paid PMI, the lender pays the premiums, but you will pay a higher interest rate on the loan. This option may cost you more over time compared to borrower-paid PMI. Additionally, you cannot get lender-paid PMI canceled in the same way as borrower-paid insurance; the main path to getting out of lender-paid PMI is to refinance.
Before agreeing to a mortgage, it is important to ask lenders about the PMI choices they offer and determine which option works best for your financial situation.
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How to avoid PMI
Private mortgage insurance (PMI) is an extra expense for borrowers who take out a conventional mortgage with a down payment of less than 20%. The purpose of PMI is to protect the lender in case the borrower defaults on the loan. This insurance is arranged by the lender and provided by private insurance companies. It is important to note that PMI does not protect the borrower, and they can still lose their home through foreclosure if they fall behind on their mortgage payments.
- Make a larger down payment: If you can put down at least 20% of the home's purchase price, you may be able to avoid PMI. This option offers advantages beyond just avoiding PMI, such as a lower mortgage interest rate and a bigger stake in your home right away. However, it is important to balance this with leaving enough savings for other expenses, such as furnishing and maintaining the home.
- Lender-paid mortgage insurance (LPMI): With LPMI, the lender pays the PMI premiums, but you will pay a higher interest rate on the loan. This option may result in you paying more over time compared to traditional PMI. Additionally, LPMI cannot be cancelled, even if you pay your mortgage balance down below 80% of the home's value.
- Piggyback loan or 80-10-10 loan: This option involves taking out two loans: one covering 80% of the home price and the other covering a 10% down payment. Combined with your 10% down payment, this effectively gives you a 20% down payment and helps you avoid PMI. However, you will need a strong credit score and the ability to qualify for two loans.
- Explore special loan programs: Certain loan programs, such as VA loans for military veterans, do not require PMI. USDA loans, backed by the U.S. Department of Agriculture, are another option for lower- and moderate-income buyers in designated rural and suburban areas.
- Shop around for lenders: Different lenders may offer varying PMI choices, so it is worth asking about their options before agreeing to a mortgage. Some lenders may require lower down payments or have specific loan types that calculate PMI differently.
It is important to carefully consider the costs and benefits of each option before deciding on a path to avoid PMI.
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PMI cancellation
Private mortgage insurance (PMI) is an extra expense for borrowers who make a down payment of less than 20% on a conventional mortgage. While it is the borrower who pays for PMI, it is the lender who benefits from it, as it insures them against loss in the event of the borrower failing to make loan payments.
You can also request PMI cancellation if you have owned the home for at least five years and your loan balance is no more than 80% of the property's new valuation. An appraisal usually costs a few hundred dollars, but it could be worth it to get out of paying PMI.
If you have a loan through the Federal Housing Administration (FHA), your mortgage insurance premiums are paid to the FHA, and you'll pay for a different kind of policy, called a mortgage insurance premium (MIP). If you take out an FHA loan and put down at least 10%, you'll pay MIP for only 11 years.
Lender-paid PMI is another option, where the lender pays the premiums, but you will pay a higher interest rate on the loan. You cannot get lender-paid PMI canceled in the same way as borrower-paid PMI; the main path to getting out of it is to refinance.
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PMI vs. FHA mortgage insurance
When taking out a mortgage, you may be required to pay for mortgage insurance, depending on the type of loan you take out and the size of your down payment. Mortgage insurance protects the lender in the event that you default on your loan. There are two main types of mortgage insurance: private mortgage insurance (PMI) and mortgage insurance premium (MIP).
PMI applies to conventional loans, which are not backed by a government program. If you make a down payment of less than 20% on a conventional loan, you will typically be required to pay PMI. The cost of PMI depends on several factors, including the size of your loan, your down payment amount, debt-to-income ratio, and credit score. Generally, the higher your credit score and the larger your down payment, the lower your PMI cost will be. You can cancel PMI once you've reached 20% equity in your home, or it will be automatically cancelled once you reach 22% equity.
On the other hand, MIP applies to FHA loans, which are loans backed by the Federal Housing Administration. FHA loans require both an upfront mortgage insurance premium (UFMIP) and annual MIP payments. The UFMIP is typically paid at closing and is equal to 1.75% of the loan amount. The annual MIP payments are made as part of your monthly mortgage payment and vary depending on the size of your loan, your down payment amount, and the loan term. MIP is required on all FHA loans, regardless of the size of the down payment, and it is generally not possible to cancel it unless you made a larger-than-average down payment.
In summary, the main differences between PMI and MIP are the types of loans they apply to and the requirements for cancellation. PMI is for conventional loans and can be cancelled once the borrower reaches a certain level of equity in their home, while MIP is for FHA loans and is typically required for the entire loan term. Additionally, PMI costs can vary based on factors such as credit score and down payment amount, while MIP costs are generally fixed at 1.75% of the loan amount upfront and vary based on loan characteristics for the annual payments.
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Frequently asked questions
Private mortgage insurance is an extra fee for conventional mortgage borrowers who make a down payment of less than 20%. It protects the lender in case the borrower defaults on the loan.
The cost of PMI depends on several factors, including the size of your loan, your down payment amount, credit score, debt-to-income ratio, and loan-to-value ratio. Generally, the larger your down payment and the higher your credit score, the lower your PMI cost will be.
Most PMI is paid monthly, added to your mortgage payment. However, some lenders may offer a one-time upfront premium payment at closing or a combination of upfront and monthly payments.
PMI can be removed from your monthly payments when you've reached 20% equity in your home or have paid your loan balance down below 80% of the purchase price. You can also avoid PMI by exploring special first-time homebuyer loans that do not require it or by choosing a lender-paid mortgage insurance option.
