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Sep 2017

What Is Private Mortgage Insurance?

If you’re considering buying a home, there are some costs associated with the mortgage loan process that people don’t always think of — including insurance. Your monthly mortgage payment is made up of PITI. The insurance portion of your payment can be made of a few different types of insurance, including home and flood insurance, as well as private mortgage insurance for conventional loans.

What is private mortgage insurance?

Private mortgage insurance (PMI) is insurance that your lender may require if you put less than 20% of the purchase price of the home down on your conventional loan. You might also have to buy PMI if you refinance your conventional home loan with less than 20% of the home value in equity.

It’s important to understand that PMI protects the lender — not you — if you default on your loan payments.

Since PMI protects the lender from default, adding it to your payment may help you qualify for a loan that you might not be able to qualify for without insurance. Your PMI will be calculated into your loan estimate, so the cost shouldn’t be a huge surprise. PMI rates usually range from 0.5 to 1% of the total loan amount annually. Let’s put this into perspective: for a home that costs $230,000, you’d pay $1,150 to $2,300 a year, or $95.83 to $191.67 a month, in PMI costs.

Do all loans require PMI?

No. PMI is usually required on conventional loans when you put down less than 20%, but some loan options don’t require PMI at all.

Sometimes you can get out of paying for PMI in exchange for a slightly higher interest rate. In general, your interest rate will increase if you choose this option.

How do I pay for my PMI?

The most common PMI is borrower-paid mortgage insurance, where you, the borrower, pay for the mortgage insurance. You will either pay PMI as a monthly premium added to your mortgage payment, once as an upfront cost at closing, or as a mixture of one upfront payment followed by monthly payments.

A little less common is lender-paid mortgage insurance. This option allows borrowers to avoid the extra cost of PMI in their monthly payments. You would think that lender-paid mortgage insurance would be straight forward, but “lender-paid” doesn’t actually mean your lender covers the costs. Choosing a lender-paid option just changes the insurance payment structure: you either pay a large sum upfront or the lender will pay the mortgage insurance premium upfront, then pass the costs to you by increasing your interest rate, so you’ll have a slightly larger mortgage payment each month.

Your monthly PMI, whether you choose borrower-paid or lender-paid mortgage insurance, should be clear in your loan estimate and closing documents. Make sure you understand this cost and don’t hesitate to ask your mortgage lender if you need clarification.

Do I pay for PMI the entire life of my loan?

The good news is that you can stop paying PMI on your conventional loan once you meet certain criteria. There are a few ways to get rid of PMI.

Requesting PMI cancellation

Once your loan-to-value (LTV) ratio gets down to 80%, you can request PMI cancellation. This means you have 20% equity in your home. If you’ve made your loan payments on time, you should hit this amount at a date that is pre-calculated in your PMI disclosure, which you should have gotten when you purchased your mortgage loan. Your lender or servicer should also be able to provide you with this date. You’ll be able to request the termination of your PMI earlier than projected if you’ve made bigger payments then what you owe each month. By paying more than your monthly payment amount, you pay down your principal faster, therefore hitting 80% LTV faster. You must meet a few other conditions to request PMI cancelation:

  • You must make the request in writing.

  • You must have a good payment history.

  • You may be required to prove that you have no liens on your home, like a second mortgage.

  • You may be required to prove that your property value has not declined from its original value.

Automatic PMI cancellation

If you don’t request PMI termination, your mortgage lender is required to cancel it when your LTV gets down to 78% of the original value of your home. In order for this to happen, you must be current on your mortgage loan payments.

To calculate your LTV, divide your current loan balance (what you still owe) by the original value of your home (generally, your contract sales price).

For example, Haley owes $130,000 on her conventional mortgage loan, which cost $170,000 when she bought it. So, 130,000 / 170,000 = 0.7645 or 76% LTV. This means that Haley no longer needs private mortgage insurance, as long as she has made all of her payments on time.

If you haven’t met either of the previous conditions, your lender or servicer is required to cancel your PMI the month after you reach the halfway point in the life of your loan. This still happens, even if you have not yet reached 78% LTV. For a 30-year loan, for example, your halfway point would be at 15 years.

For many, a 20% down payment is tough, and PMI might be required. So, it’s important to know what PMI is and the different options you have when it comes to PMI for your mortgage loan.