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Important points
Private mortgage insurance (PMI) is an additional charge on a conventional mortgage for borrowers with a down payment of less than 20%.
The amount you pay for PMI depends on the size of your loan and down payment, whether your mortgage is fixed-rate or variable-rate, and your credit score.
Once your mortgage balance reaches 80% of your home’s value, you can request to cancel your PMI. If you don’t make this request, your lender must cancel your PMI when your balance reaches 78% of your home’s value, or half way through your loan term.
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance (PMI) is an additional expense for traditional mortgage borrowers who put less than 20% down on their home purchase. Although the borrower pays for it, PMI actually protects the lender and compensates for the additional risk the lender takes on by making a larger loan with a smaller down payment.
However, you won’t pay PMI forever. Lenders are required to cancel your mortgage balance when it drops to 78% of the home’s original value (value at the time of purchase), or half of the loan term.
Even before this scheduled date, you can ask your lender to remove PMI once you’ve paid off your mortgage balance to 80% of the home’s original price.
Alternatively, if your home’s value increases and your equity reaches 20%, you can request to have PMI removed before your scheduled payment. In this case, you will need to pay for an appraisal or broker’s price opinion to establish value. It may be worth the cost to eliminate PMI faster.
current mortgage interest rate
Is PMI required for all types of mortgages?
PMI is not required for all types of mortgages. This is only required for borrowers obtaining a conventional mortgage with a down payment of less than 20%.
That said, FHA loans also include a mortgage insurance premium known as MIP. These are structured differently than PMI on traditional loans.
PMI vs. MIP vs. MPI
- PMI
- PMI is a type of insurance that protects lenders if you default on your mortgage. Applicable if down payment is less than 20%.
- M.I.P.
- Mortgage insurance premium (MIP) is a type of mortgage insurance that comes with mortgages insured by the Federal Housing Administration (FHA). It includes an upfront premium and an annual premium, usually paid at closing, and usually continues for the life of the loan.
How much does PMI cost?
According to the Urban Institute, the average monthly cost of PMI is 0.46% to 1.5% of the loan amount.
PMI example
Here we take a look at how PMI plays out based on the amount invested. This example assumes a 30-year fixed-rate mortgage with an interest rate of 6.89% on a $405,000 home purchase.
| down payment | 5% down | 10% down | 15% down | 20% down |
|---|---|---|---|---|
| monthly PMI payment | $369 | $237 | $96 | $0 |
| monthly mortgage payment | $2,531 | $2,398 | $2,265 | $2,132 |
| Total monthly mortgage payment (including PMI) | $2,900 | $2,635 | $2,361 | $2,132 |
| Note: Total monthly mortgage payment does not include homeowners insurance and property taxes. Source: Freddie Mac | ||||
How to pay PMI
There are three main ways to pay PMI. Options may vary by lender.
- monthly: The most common method is to pay your PMI premium monthly along with your mortgage payment. This will result in a larger monthly bill, but allows you to spread the premium over the year.
- advance payment: Another option is to pay PMI upfront. This means you pay the entire year’s premium at once. Your monthly mortgage payment will be lower, but you’ll still need to set aside funds for your annual expenses. Also, if you move any time during the year, you may not get some of your PMI back.
- hybrid: The third option is a hybrid option. You pay part upfront and part monthly. This is helpful if you have extra cash at the beginning of the year and want to reduce your monthly housing costs.
Factors influencing the cost of PMI
- your credit score: Your credit score has a big impact on the cost of PMI. Generally, the higher your score, the lower your PMI costs.
- your Loan-to-value (LTV) ratio: The LTV ratio measures the ratio of the purchase price of the home you are financing to the value of the home. The higher the LTV ratio, the higher the PMI payment.
- your loan type: Adjustable rate mortgages (ARMs) are riskier for lenders, so you may end up paying a higher PMI with an ARM than with a fixed rate loan.
- down payment amount: The closer your down payment is to 20%, the lower your PMI will be.
Types of private mortgage insurance
PMI paid by the borrower
When talking about mortgage insurance, most people refer to the borrower-paid PMI. With borrower-paid PMI, the premium becomes part of your monthly mortgage payment. Once you reach 20% equity in your home, you can request these cancellations.
PMI for lender payments
Lender-paid mortgage insurance, also known as a loan without PMI, is quite different from its name. With lender-paid PMI, the lender pays a premium, but you also pay in the form of a higher interest rate on your loan. Higher interest rates often end up costing you more in the long run than the additional amount you pay each month in PMI. Just like with borrower-paid insurance, lender-paid PMI cannot be canceled. The main way to get out of lender-paid PMI is to refinance.
Single Premium PMI
Single premium PMI consolidates your entire premium into one lump sum payment, rather than dividing your payment into regular monthly installments. Depending on the terms of your loan, you can pay in full at closing or roll the amount into your loan to increase your balance. Prepaying has the advantage of lowering your monthly mortgage payments. However, you may not have the funds to make this happen. Additionally, if you sell your home before PMI payments stop, you will have paid the premium upfront without any benefit.
Split Premium PMI
With a split-premium PMI policy, you pay a large upfront fee that covers a portion of your total premium. The rest will be paid together with your monthly mortgage. This strategy combines the advantages and disadvantages of single premium and borrower-paid PMI. You will need some cash to pay the upfront premium, but not much. Also, the monthly payments are not too high. Split premium mortgage insurance can also be helpful if you have a high debt-to-income (DTI) ratio. This can help lower your estimated mortgage payment and avoid your DTI becoming high enough to disqualify you from a loan.
Do I need to pay PMI?
The typical home in the United States sells for nearly $400,000, and you’ll need to write a check for $80,000 to come up with a 20 percent down payment. Many first-time buyers don’t have that much money. So while paying for private mortgage insurance isn’t everyone’s cup of tea, PMI has the advantage of allowing buyers to enter a difficult housing market even if they don’t have cash saved up.
—Jeff Ostrowski, Bankrate Chief Writer
How to avoid paying PMI
It is possible to avoid paying PMI. Here’s how:
- lower 20 percent: If you make a 20% down payment on your home, you can avoid PMI spending entirely. Down payment assistance may be helpful, but it may be difficult to save for it.
- See if your lender offers piggyback loan: A piggyback loan, also known as an 80/10/10 or combination mortgage, is a form of two loans: one that pays 80 percent of the home price and one that pays 10 percent of the home price. Take. You will then be required to make a 10% down payment. Advantages: You don’t have to pay PMI. Disadvantages: Both loans can end up costing more than PMI in interest rates and closing costs.
- Get a VA loan: PMI is not required for mortgages insured by the Department of Veterans Affairs (VA). If you are a veteran, active duty military member, or a surviving spouse, you may qualify for a VA loan that requires no down payment or PMI. However, you will have to pay a funding fee.
How to avoid PMI
There are several ways to avoid PMI.
- Request PMI cancellation: Federal law allows you to request PMI cancellation if your LTV ratio drops to 80%. You’ll likely need to submit your request in writing to your lender or loan servicer, and you may need to obtain an appraisal or brokered price opinion.
- Wait until it is automatically canceled. Federal law states that mortgage lenders must automatically terminate PMI if the LTV ratio drops to 78% or one month past the midpoint of the loan term.
- Get your home revalued: With home prices rising, you may already have 20% equity in your home, even if you haven’t owned your home for that long. To prove this, you’ll need to have your home revalued by a professional appraiser or broker.
