Haris Ashley
Private mortgage insurance (PMI) is an extra fee for conventional mortgage borrowers who put down less than 20% of the purchase price. PMI is arranged by the lender and provided by private insurance companies, protecting the lender—not the borrower—if the borrower stops making payments on their loan. The cost of PMI depends on several factors, including the size of the mortgage loan, the down payment amount, and the borrower's credit score. PMI can be paid monthly, upfront, or a combination of both. Borrowers can request to cancel PMI when their mortgage balance reaches 80% of their home's value, and lenders are required to cancel it automatically when the balance reaches 78%.
| Characteristics | Values |
|---|---|
| What is PMI? | Private Mortgage Insurance |
| Who does it protect? | The lender, not the borrower |
| When is PMI required? | When a borrower takes out a conventional loan with a down payment of less than 20% of the purchase price or has less than 20% equity when refinancing |
| How much does it cost? | Depends on the size of the mortgage loan, the down payment amount, the credit score, and the type of mortgage |
| How is it paid? | Monthly as part of the mortgage payment, or as a one-time upfront premium, or a combination of both |
| Can PMI be cancelled? | Yes, when the mortgage balance reaches 78-80% of the original value of the home or when the borrower has paid the loan balance low enough |
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What You'll Learn
When is PMI required?
Private mortgage insurance (PMI) is required when homebuyers make a down payment of less than 20% of the home's value. It is an extra expense for conventional mortgage borrowers, and it protects the lender if the buyer stops making loan payments.
PMI is not required for all types of mortgages, only for conventional mortgages with a down payment of less than 20%. If you are able to make a 20% down payment, PMI is not required, and you may also receive a lower interest rate.
PMI can be paid in a few different ways. The most common way is as a monthly premium added to your mortgage payment. Sometimes, it can also be paid as a one-time upfront premium at closing, or a combination of upfront and monthly payments.
It's important to note that PMI does not protect the homebuyer. If you fall behind on your mortgage payments, you can still lose your home through foreclosure. PMI can increase the cost of your loan, so it's important to consider your financial situation and seek advice before agreeing to a mortgage with PMI.
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How much does PMI cost?
The cost of Private Mortgage Insurance (PMI) varies according to several factors. The average cost of PMI for a conventional home loan ranges from 0.46% to 1.50% of the original loan amount per year, according to the Urban Institute's Housing Finance Policy Center. However, PMI typically costs between 0.2% and 2% of your loan amount per year.
The down payment amount, credit score, total mortgage amount, and type of mortgage can all influence the PMI rate. For example, a larger down payment can result in a lower PMI cost. Similarly, a higher credit score can lead to a reduction in PMI costs. Lenders usually require PMI if you put down less than 20% on a conventional home loan.
Borrowers with lower credit scores, high debt-to-income ratios (DTIs), and smaller down payments typically pay higher mortgage insurance rates. Building your credit score, reducing debt, and increasing your down payment can help lower PMI costs.
Calculators are available to estimate the total cost of PMI over the mortgage's life. Using such tools can help homebuyers understand their expenses and make informed decisions about their loans and purchases.
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How to pay for PMI
Private mortgage insurance (PMI) is a type of 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 protects the lender if you stop making payments on your loan. It is important to note that PMI does not protect you and you can still lose your home through foreclosure if you fall behind on your mortgage payments.
One-time upfront premium
Sometimes, PMI can be paid with a one-time upfront premium at closing. This option is shown on your Loan Estimate and Closing Disclosure. However, if you move or refinance after making an upfront payment, you may not be entitled to a refund of the premium.
Monthly premiums
PMI can also be paid as part of your monthly mortgage payments. This option is usually added to your monthly mortgage payment and can make the cost more affordable by breaking it down into smaller instalments.
Combination of upfront and monthly payments
In some cases, lenders may offer a combination of upfront and monthly payments for PMI. This option may involve a lower monthly premium compared to paying solely through monthly instalments.
Lender-paid PMI
In rare cases, lenders may offer to pay for PMI with a lump sum when you close your loan. This option is known as lender-paid PMI and is less common than borrower-paid PMI.
It is important to note that PMI costs can vary depending on various factors, including the size of your down payment, your credit score, the mortgage amount, and the type of loan. Additionally, PMI may be removed or cancelled once you have reached a certain level of equity in your home or paid down your loan balance sufficiently.
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Cancelling PMI
Private mortgage insurance (PMI) is a type of insurance that is required when homebuyers make a down payment of less than 20% of the home's value. It is an additional cost that protects the lender if the borrower stops making mortgage payments. While PMI can help borrowers qualify for a loan, it increases the overall cost of the loan.
PMI can be cancelled once the borrower has reached 20% equity in their home or has paid off enough of their loan balance. The specific conditions for cancelling PMI vary depending on the lender and the type of mortgage loan. Here are some general guidelines and strategies for cancelling PMI:
- Reach 20% Equity: PMI is typically required when homebuyers make a down payment of less than 20% of the home's value. By saving up and making a larger down payment, you can avoid PMI altogether. Additionally, reaching 20% equity in your home allows you to request cancellation of PMI.
- Monitor Your Loan Balance: Keep track of your loan balance and its ratio to the original value of your home. When your loan balance reaches 78%-80% of the original value, you may be eligible to cancel PMI. Contact your loan servicer to discuss options and determine your eligibility.
- Request Cancellation: You have the right to request that your servicer cancel PMI when your loan balance reaches 80% of the original value of your home. This request can be made ahead of the scheduled date if you have made additional payments that reduce the principal balance. The request should be made in writing, and you must be current on your monthly payments for the cancellation to be granted.
- Automatic Cancellation: According to the Homeowners Protection Act of 1998, mortgage lenders or servicers are required to automatically cancel PMI when the loan-to-value (LTV) ratio reaches 78% or the month after reaching the midpoint of the loan term (e.g., 15 years on a 30-year loan).
- Refinance or Reappraise: Consider refinancing your mortgage or reappraising your home to potentially eliminate the need for PMI. With rising home values, you may have built up enough equity to refinance and avoid PMI. Alternatively, a higher valuation through reappraisal can help you meet the conditions for PMI cancellation.
- Prepay Your Mortgage: If your budget allows, consider making extra payments towards your principal to reach the 20% equity threshold faster. This can be done through biweekly payments, an additional annual payment, or a lump sum payment. Ensure that these extra payments are applied to the loan's principal and not the next payment or interest.
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PMI vs. homeowner's insurance
Private Mortgage Insurance (PMI) and homeowners insurance are both important but serve distinct purposes and cost different amounts. PMI is a type of insurance that protects the lender in the event that the borrower defaults on their mortgage payments. It is typically required when the borrower makes a down payment of less than 20% of the home's purchase price. This is because lenders regard mortgages with low down payments as risky and want to ensure they don't suffer losses if the borrower cannot meet their payments.
On the other hand, homeowners insurance offers financial protection to homeowners themselves in the event of damage or loss to their property. It also provides liability protection if someone is injured on the property. Homeowners insurance is not legally required at the federal or state level, but most lenders mandate it for the life of the loan. The price of homeowners insurance varies based on location, home characteristics, and risk factors. Standard policies include dwelling coverage, other structures coverage, personal property coverage, liability insurance, medical payments coverage, and additional living expenses coverage. It is important to note that homeowners insurance does not typically cover risks like floods or earthquakes unless specifically added to the policy.
PMI can be removed once the borrower has built up enough equity in their home, typically when they reach 20% equity, although it may be automatically cancelled at 78% loan-to-value. Homeowners insurance, however, is intended to be a long-term cost and continues as long as premiums are paid. While PMI protects the lender, homeowners insurance protects the homeowner's investment and helps to safeguard the lender's collateral. Understanding the differences between PMI and homeowners insurance is crucial for new homeowners to make informed financial decisions and avoid unnecessary costs.
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Frequently asked questions
Private Mortgage Insurance is an insurance policy that protects the lender if a borrower defaults on a home loan.
PMI is required when homebuyers make a down payment of less than 20% of the home's value. It is also required when refinancing a conventional loan, and your equity is less than 20% of the value of your home.
The cost of PMI depends on several factors, including the size of the mortgage loan, the down payment amount, your credit score, and the type of mortgage. The average annual cost typically ranges from $30 to $70 per $100,000 borrowed.
You can request to cancel PMI when your mortgage balance reaches 80% of your home's value. Lenders are required to cancel PMI when the mortgage balance drops to 78% of the home's original value or when you are halfway through your loan term, whichever comes first.
