Orlando Harmon
Private Mortgage Insurance (PMI) is an insurance policy that is required for some mortgages where the down payment is lower than 20%. It is an extra expense for conventional mortgage borrowers who make a down payment of less than 20% and protects the lender in the event that the borrower defaults on their loan. PMI does not protect the borrower, and they can still lose their home through foreclosure. The cost of PMI depends on several factors, including the size of the loan, the down payment amount, the type of mortgage, and the borrower's credit score. There are several different forms of PMI, including borrower-paid PMI, single-premium PMI, and split-premium PMI.
| Characteristics | Values |
|---|---|
| Full form | PMI (Private Mortgage Insurance) |
| Who pays for it? | The borrower pays for it, but it protects the lender |
| When is it required? | When the down payment is less than 20% of the purchase price of the home, or when the loan-to-value (LTV) ratio is more than 80% |
| How is it paid? | Monthly, upfront, or a combination of both |
| Cost | Between $30 to $70 per $100,000 borrowed; between 0.45% to 1.5% of the loan amount |
| Cancellation | Can be cancelled once the mortgage balance reaches 78-80% of the home's value |
| Tax deductible | Not tax deductible for personal residences, but tax deductible for investment or rental properties |
| Alternatives | Federal Housing Administration (FHA) loan, Department of Veterans' Affairs (VA)-backed loan, or a "piggyback" second mortgage |
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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, the type of mortgage (fixed-rate or adjustable-rate), and the borrower's credit score. The higher the credit score, the lower the PMI rates. Borrowers with excellent credit can expect to pay lower PMI rates, such as between $105 and $245 per month for a $350,000 mortgage.
There are different ways to pay for PMI. It can be paid monthly as part of the mortgage payment, or it can be paid upfront as a one-time premium when the loan is closed. In some cases, a combination of upfront and monthly payments may be offered. The specific payment structure will depend on the lender and the terms of the loan.
PMI is typically required until the borrower builds up at least 20% equity in their home. At that point, the borrower can request to cancel PMI. Federal law also dictates that the lender must automatically end PMI when the loan-to-value (LTV) ratio drops to 78% or when the borrower is one month past the midpoint of their loan term.
While PMI increases the cost of the loan, it can help borrowers qualify for a loan they might not otherwise be able to obtain. It allows homebuyers to make a smaller down payment while offsetting some of the risks to the lender.
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PMI cost
The cost of private mortgage insurance (PMI) depends on several factors, including the size of the loan, the down payment amount, the credit score, and the debt-to-income ratio. The larger the loan amount and the smaller the down payment, the more you will have to pay for PMI. On the other hand, a higher credit score and a lower debt-to-income ratio will typically result in lower PMI rates.
The average cost of PMI for a conventional home loan ranges from 0.2% to 2% of the original loan amount per year, which equates to around $30 to $70 per $100,000 borrowed. For example, on a $300,000 mortgage, PMI could cost anywhere between $600 and $6,000 per year, or $115 to $375 per month.
There are several ways to pay PMI. The most common type, borrower-paid PMI, involves the insurance payment being added to your monthly mortgage payment. Alternatively, you can pay for PMI upfront in a single premium when you close your loan, although this option is less common. Lender-paid PMI is another option, where the lender pays the premiums, but you will pay a higher interest rate on the loan.
PMI is typically required when the down payment on a conventional loan is less than 20%. It is an extra expense that protects the lender in the event that the borrower defaults on the loan. It is important to note that PMI does not provide borrowers with any protection from foreclosure.
There are ways to avoid paying for PMI. One way is to make a 20% down payment on the home, which will help you avoid the PMI expense altogether. Another way is to choose a different type of loan, such as a government-backed loan like an FHA or USDA loan, which do not require PMI but may have their own equivalent fees.
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PMI cancellation
Private Mortgage Insurance (PMI) is an extra expense for conventional mortgage borrowers who make a down payment of less than 20%. Although the borrower pays for it, PMI protects the lender since they take on more risk by lending a larger loan with a lower down payment. The average monthly cost of PMI is 0.46% to 1.5% of the loan amount, according to the Urban Institute.
Secondly, lenders are also required to cancel PMI when the mortgage balance drops to 78% of the home's original value or once the loan reaches the midpoint of its amortization schedule, whichever comes first. This midpoint is typically reached after 15 years for a 30-year loan. It is worth noting that the lender must be current on monthly payments for PMI cancellation to occur.
Additionally, some lenders may agree to cancel PMI based on the home's current value if significant improvements have been made. An appraisal may be required to demonstrate that the home's value has appreciated. Under Minnesota law, for example, the value of a home is based on its current market value, allowing homeowners to benefit from market appreciation.
It is important to review the specific PMI cancellation guidelines provided by your lender, as they may differ. For instance, loan investors like Fannie Mae and Freddie Mac may have their own cancellation policies. Furthermore, mortgages obtained through the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) have distinct requirements.
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Borrower-paid PMI
Private mortgage insurance (PMI) is a supplemental insurance policy required for some mortgages with a down payment lower than 20%. Borrower-paid PMI, also known as borrower-paid monthly insurance (BPMI), is the most common type of mortgage insurance. It is often simply referred to as "PMI". With BPMI, the borrower must pay a premium every month until they reach 20% equity in their property. The cost of PMI and how you pay your lender will depend on the unique terms of your loan.
PMI premiums can range from 0.2% to over 1% of the loan amount per year, paid in monthly instalments. For example, a $200,000 loan amount at an annual premium of 0.5% would cost $83 per month. PMI payments are heavily based on credit score. A buyer with a low credit score will pay a higher premium than a buyer with a high credit score.
Borrower-paid single premiums are available in both refundable and non-refundable options. The absence of a monthly PMI payment often provides a lower monthly payment than monthly or split premiums. The borrower, seller, builder, or other third party can pay the premium at closing. Lenders may offer a lender credit to cover the cost of the premium. The borrowers can opt to finance the premium into the loan amount. Borrowers can request cancellation based on investor requirements or under the Homeowners Protection Act of 1998 (HPA). Borrowers who select refundable single premiums may receive a refund if they cancel PMI within the first 5 years of coverage.
Borrower-paid choice monthly premiums give borrowers the option of paying part of the PMI premium upfront to reduce the monthly PMI premium amount. The borrowers, seller, builder, or other third party can pay the upfront portion of the premium at closing. Lenders may offer a lender credit to cover the cost. The borrowers can also opt to finance the upfront premium into the loan amount. The monthly portion is cancellable – borrowers can request cancellation based on investor requirements or under the Homeowners Protection Act of 1998 (HPA).
Borrower-paid split premiums give borrowers the option of paying part of the PMI premium upfront to reduce the monthly PMI premium paid along with their mortgage payment. There are multiple upfront options to allow the borrower to choose the right option. The borrowers, seller, builder, or other third party can pay the upfront portion of the premium at closing. Lenders may offer a lender credit to cover the cost. The borrowers can also opt to finance the upfront premium into the loan amount. The monthly portion is cancellable – borrowers can request cancellation based on investor requirements or under the Homeowners Protection Act of 1998 (HPA).
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Lender-paid PMI
Lender-paid mortgage insurance (LPMI) is a type of private mortgage insurance (PMI) where the lender covers the cost of mortgage insurance. LPMI is typically offered to borrowers who make a down payment of less than 20% on their home loan. While LPMI does not increase monthly payments as much as PMI, it does result in a higher mortgage rate for the life of the loan. The cost of LPMI is built into the interest rate of the loan, and lenders recoup their costs by charging a slightly higher interest rate. This higher interest rate increases the overall cost of borrowing and may be more expensive than PMI in the long run.
LPMI is not offered by every lender and is typically available only through select lenders. It is important to note that LPMI cannot be cancelled and remains in effect until the loan is paid off or refinanced. To get rid of LPMI, borrowers must refinance or pay off their loan. Additionally, LPMI may not be a good option for those looking to refinance, as it may not result in a lower underlying rate.
The cost of LPMI can vary depending on several factors, including the credit score and down payment amount. Borrowers can request a quote with and without LPMI to determine the cost specific to their situation. While LPMI may result in lower short-term and medium-term savings compared to PMI, it is important to consider the benefits and drawbacks of each option.
In some cases, LPMI may be tax-deductible. If borrowers itemize their tax deductions, the interest paid on their mortgage, including LPMI, may be deductible. However, it is important to note that borrower-paid PMI is no longer tax-deductible as of the 2021 tax year.
LPMI can be a viable option for borrowers who want to buy a home with a low down payment and protect the lender in case of default on the loan. However, it is important to carefully consider the potential higher total loan costs, the inability to remove LPMI, and the limited availability through select lenders.
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Frequently asked questions
Private mortgage insurance (PMI) is a type of insurance that you may be required to buy if you take out a conventional loan with a down payment of less than 20%. It protects the lender if you stop making payments on your loan.
The cost of PMI depends on several factors, including the size of the mortgage loan, the down payment amount, the type of mortgage, and your credit score. The more you borrow and the lower your credit score, the more you will pay for PMI.
There are two main types of PMI: borrower-paid and lender-paid. With borrower-paid PMI, your insurance payment is added to your monthly mortgage payment. With lender-paid PMI, your lender pays the premiums, but you will pay a higher interest rate on the loan.
Yes, you can avoid PMI by making a down payment of at least 20%. You can also request to remove it when you reach 20% equity in your home.
