Paul Sanchez
Private mortgage insurance (PMI) is a type of insurance that is usually required when homebuyers make a down payment of less than 20% of the home's value. It protects the lender if the buyer defaults on their loan. PMI is associated with conventional loans, while FHA mortgage insurance is associated with FHA loans. PMI can be removed from your monthly payments in two ways: when you pay your loan balance down below 80% of the purchase price of your home, or once you have achieved 20% equity in your home. It is important to note that PMI does not benefit the borrower and can be an additional cost on top of your mortgage payments.
| Characteristics | Values |
|---|---|
| When does mortgage insurance drop off on a conventional loan? | When the loan balance reaches 78% of the original value, or when the loan-to-value (LTV) ratio falls below 80% |
| Who decides when to terminate the mortgage insurance? | The servicer must determine when the mortgage insurance is due to automatically terminate |
| What are the conditions for termination? | The borrower's payments must be current on the date of termination, and they must have an acceptable payment history |
| What is the cost of mortgage insurance? | Typically 0.5% to 1% of the total loan amount per year, but can range from 0.58% to 1.86% annually |
| What is the benefit of mortgage insurance? | It allows lenders to take on more risky loans and protects them in case the borrower defaults on payments |
| Who does mortgage insurance protect? | Only the lender, not the borrower |
| Can I refinance to get rid of mortgage insurance? | Yes, refinancing to a conventional loan from an FHA loan can eliminate the need for mortgage insurance |
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What You'll Learn
Private mortgage insurance (PMI)
PMI can be paid in a few different ways. Single-premium PMI is paid in a lump sum at closing, and the borrower may receive assistance from sellers or homebuilders. Sometimes, PMI is paid with both upfront and monthly premiums. The upfront premium is shown on the Loan Estimate and Closing Disclosure, and the monthly premium is shown in the Projected Payments section of the Loan Estimate.
PMI is not a permanent cost. Lenders are required to cancel PMI when the mortgage balance reaches 78% of the home's original value, or once the borrower is halfway through the loan term, whichever comes first. Borrowers can request to cancel PMI when their mortgage balance reaches 80% of their home's value. Alternatively, borrowers can wait for automatic cancellation, refinance their mortgage, or reappraise their home.
PMI protects the lender, not the borrower. It insures the lender against losses caused by borrowers failing to make loan payments. PMI allows lenders to issue mortgages with down payments of less than 20%.
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Mortgage insurance premium (MIP)
MIP serves the same function as PMI, but where PMI applies to conventional loans, MIP is charged on FHA loans. MIP includes an upfront premium paid at closing or built into the loan amount, as well as annual premiums paid on a monthly basis. The upfront MIP is typically 1.75% of the total loan amount, while the annual MIP ranges from 0.15% to 0.75% of the loan amount, depending on factors such as the loan term, loan amount, and down payment or 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, borrowers must pay MIP for the life of the loan if they made a down payment of less than 10% of the home's value. If a borrower made a down payment of at least 10%, they will only pay MIP for 11 years. For FHA loans originated between December 31, 2000, and June 3, 2013, borrowers may request the lender to cancel the MIP if they have paid off at least 78% of the loan-to-value amount. The only way to remove MIP on an FHA loan is to refinance it into a non-FHA product.
It is important to note that mortgage insurance premiums were once tax-deductible, but this is no longer the case. Lenders are required to send Form 1098 Mortgage Interest Statement to both the borrower and the Internal Revenue Service (IRS), which includes the total MIP or PMI premiums.
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How to remove PMI
Private mortgage insurance (PMI) is a type of insurance that applies to conventional loans. It is usually required when homebuyers put down less than 20% on a conventional loan. While it allows homebuyers to make smaller down payments, it is an additional cost that many people want to remove. Here are some ways to remove PMI:
Wait for automatic termination
Your servicer must automatically terminate PMI when your principal balance is scheduled to reach 78% of the original value of your home. This will only occur if you are current on your monthly payments. Additionally, your lender or servicer must end the PMI the month after you reach the midpoint of your loan's amortization schedule, which is halfway through the original full term of your loan. For example, for 30-year loans, the midpoint is after 15 years.
Request PMI cancellation
You have the right to ask your mortgage lender or servicer to cancel PMI once you've built up enough equity in your home. Specifically, you can request cancellation when your mortgage 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 to 80% of the original value. The date when you can first make this request should appear on your PMI disclosure form, which you received along with your mortgage. If you cannot find the disclosure form, contact your servicer.
Refinance your mortgage
With rising home values, you may have the equity needed to refinance your mortgage and avoid paying PMI. Refinancing to a conventional loan can also help eliminate your Mortgage Insurance Premium (MIP) if you originally had a loan from the Federal Housing Administration (FHA). However, be cautious when refinancing, as it may not always be the best financial decision.
Pay down your mortgage earlier
You can remove PMI by paying down your mortgage earlier, reducing the principal balance to 80% of the original value of your home. This option may be feasible if you can make additional payments.
Reappraise your home
You can request a reappraisal of your home to determine if the value has increased. If the value has appreciated, it may help you reach the required equity level to cancel PMI.
It's important to note that loan investors, such as Fannie Mae and Freddie Mac, may have their own PMI cancellation guidelines. Additionally, if your lender is paying for your mortgage insurance, different rules may apply. Always review the terms of your loan and consult with your lender or servicer to understand the specific requirements and options for removing PMI in your case.
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FHA loans
If you have taken an FHA loan from the Federal Housing Administration, you will have to pay a Mortgage Insurance Premium (MIP) instead of Private Mortgage Insurance (PMI). MIP is a different kind of policy that serves the same function as PMI. However, you must pay for MIP no matter how much you put down on an FHA loan, and in many cases, you will pay it for the life of the loan.
FHA mortgage insurance can be challenging to eliminate but it is not impossible. If you put down at least 10% on an FHA loan, you will pay MIP for 11 years instead of the life of the loan. In this case, the MIP will drop off after 11 years. However, if you make a down payment of less than 10%, you cannot cancel the FHA mortgage insurance by reaching a certain equity threshold. The only way to get rid of it is by refinancing the mortgage into a non-FHA loan.
If you refinance to a conventional loan, you can get rid of MIP. However, if your LTV ratio is 80% or higher, you will still have to pay for mortgage insurance, and PMI could be pricier than FHA MIP. Therefore, it is important to calculate whether refinancing will save you money in the long run.
To be eligible for FHA mortgage insurance removal, your loan must be in good standing, meaning you have made all mortgage payments on time, and you must have a good payment history over the previous 12 months. Additionally, you must not have any outstanding FHA loans or past-due federal debt, and your property must be your principal residence.
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Conventional loan requirements
Conventional loans are mortgages that are not backed by the government. They are usually issued by private lenders, such as banks and credit unions. They are the most common type of mortgage, comprising 67.6% of home sales in 2023.
Requirements for a Conventional Loan
- A credit score of at least 620. A score of 720 or higher is recommended for a better interest rate.
- A down payment of at least 3%. A higher down payment will result in lower PMI costs.
- A debt-to-income ratio (DTI) of below 36%. This is calculated by dividing your monthly debt obligations by your gross monthly income.
- A stable income.
- A good credit history. If you have experienced bankruptcy or foreclosure, you will need to wait longer before applying for a conventional loan compared to other types of mortgages.
Private Mortgage Insurance (PMI)
If you put down less than 20% on a conventional loan, you will be required to pay PMI. This insurance provides a payment for part of the outstanding loan amount if the borrower defaults. The cost of PMI is typically between 0.46% and 1.5% of the loan amount per year.
You can request to cancel PMI when your mortgage balance reaches 80% of the original value of your home. This typically happens halfway through the loan's term. At this point, your lender or servicer may automatically cancel PMI.
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Frequently asked questions
Mortgage insurance is a way for lenders to protect themselves in case the borrower defaults on payments. It is also known as private mortgage insurance (PMI) and is usually required when the buyer makes a down payment of less than 20% of the home's value.
You can request to cancel your PMI when your loan balance reaches 80% of the original value of your home. You can also wait for automatic termination, which usually happens when your loan balance reaches 78% of the original value.
PMI is associated with conventional mortgage loans, while FHA mortgage insurance, or MIP, is associated with FHA loans. PMI can be removed once you have reached 20% equity in your home, while FHA mortgage insurance may require refinancing.
PMI typically costs between 0.5% and 1% of your total loan amount per year. In 2022, it ranged from 0.58% to 1.86% annually.
Yes, one alternative is to refinance your mortgage. By refinancing, you may be able to eliminate the need for PMI by increasing your equity.
