Mortgage insurance is an expense many homeowners must shoulder, with payments included as part of your monthly mortgage payment and required for most conventional loans with down payments of less than 20%.
PMI does not serve your interests; rather, it protects the lender. But you may still find a loan without PMI requirements.
What is PMI?
Mortgage insurance (PMI) is a form of lender-paid protection intended to safeguard them against possible default on their loans by protecting lenders from losses in case borrowers default. Most lenders require PMI until you’ve built up at least 20% equity, though there may be other ways you can bypass it if necessary.
PMI (Private Mortgage Insurance) is provided by private companies who offer it as insurance to mortgage lenders, with premiums calculated as a percentage of your loan balance; they increase as your loan-to-value (LTV) ratio does; occasionally you may need to pay one-time premium at closing as part of mortgage costs, though most people add a monthly premium when paying their loans.
Payment by installment can be the more cost-effective choice for homeowners, since you won’t need to come up with the large sum required by upfront versions and only pay PMI as long as your loan remains active.
Your lender can add monthly PMI directly into your mortgage payments so you won’t need to remember an extra payment or provide proof of coverage separately. Your monthly mortgage statement will contain details regarding PMI charges.
Some lenders offer split-premium mortgage insurance options, requiring that part of your premium be paid upfront and part each month. This could be beneficial to people without access to substantial cash reserves who want conventional financing but require PMI as part of qualifying criteria, or those whose credit scores don’t allow for conventional financing without payment of PMI upfront.
One way to avoid PMI is by saving enough for a large down payment on your dream home or considering loans from government-backed agencies that don’t require mortgage insurance, like FHA and Veterans Affairs loans. Unfortunately, however, this option might take longer than anticipated for many buyers to achieve success.
How Does PMI Work?
Mortgage insurance provides lenders with protection from incurring losses if borrowers default on their loans. Depending on the type of loan, mortgage insurance premiums could either be paid as part of closing costs, or up front in one or more payments as an upfront lump sum or monthly charge added to mortgage payments. All premium payments should be itemized on Loan Estimate and Closing Disclosure forms.
PMI protects lenders up to 80% of the home’s purchase price in case a borrower defaults, helping reduce loss incurred from foreclosure auction sales and enabling it to continue as an institution.
Borrower-paid mortgage insurance (BPMI) is the most prevalent form of PMI. This typically takes the form of an additional monthly fee added onto your monthly mortgage payment and is frequently required when financing conventional loans with low down payments or refinancing with less than 20% equity.
Lender-paid mortgage insurance (LPMI), is another type of PMI. Here, lenders cover the premium but pass it along through higher interest rates; this form of PMI may increase costs significantly over time and should be avoided as much as possible.
Most lenders require mortgage insurance on conventional mortgages with down payments of less than 20% and certain FHA loans; however, if you wait to put down a large deposit after buying a house then PMI might not apply at all.
Government loans such as VA and USDA loans don’t require PMI at all, while making a larger down payment is also an effective way of forgoing PMI costs and qualifying for more favorable loan terms and interest rates.
Can I Get Rid of PMI?
Once your equity in your home has built up to 80% of its original value (lower of contract sales price or appraised value at origination), mortgage insurance may be removed; this typically happens when your loan balance reaches 80% of original value; but if it has increased since, refinancing into another loan program that doesn’t charge PMI may also help – for instance government-backed USDA and VA loans do not charge PMI premiums.
Are You Wondering About Private Mortgage Insurance (PMI)? Do a Piggyback Refinance to Reduce PMI. A piggyback refinance involves taking out an additional mortgage to cover any remaining balance on your first loan that exceeds 80% of its value, paying much lower monthly payments, and eliminating PMI altogether.
Another option is for lenders to automatically remove PMI when your loan balance reaches 78% LTV or 22% LTV – whichever comes first – via your amortization schedule or loan servicer. In this instance, this requires on-time and uninterrupted payments with no late or missed installments.
People typically wait until they have 20% equity to request that PMI be removed, but sometimes taking action earlier makes more sense. For instance, if improvements to your home have increased its value significantly and thus require the lender to recalculate your loan-to-value ratio accordingly.
Convincing your lender to remove PMI early will reduce monthly mortgage costs while building savings that could provide protection in case of job loss or health crisis. If they refuse, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).
PMI premiums can quickly add up, especially if you purchase an overpriced home or interest rates increase, which is why it is vital that you understand the rules and schedule for cancelling PMI so you can plan for its removal to save money over time.
What if I Can’t Get Rid of PMI?
There are various strategies you could try to eliminate PMI depending on your circumstances and specifics of your mortgage term remaining. Some strategies will likely prove more feasible than others and the ideal decision will depend on when that term ends for you.
Dependent upon your lender, PMI could be cancelled when your loan-to-value ratio hits 80% (or in the case of FHA loans, halfway point of your loan term). This requires two years of seasoning payments according to original loan terms in order to reach these equity milestones and submit an appraisal showing that home values have actually increased rather than declined.
For FHA loans or conventional mortgages backed by Fannie Mae or Freddie Mac, your servicer is required by law to cancel PMI once your balance reaches 80% of its original value. However, you can request early cancellation at any time; most lenders will honor such requests when submitted in writing at least 45 days before loan maturity date.
While adding on to your home just to get rid of PMI isn’t economically sound, certain renovations could help get there faster. For instance, adding a pool or bathroom may increase its appraised value enough to bring you past 20% threshold and help eliminate PMI altogether.
Refinancing may also help you eliminate PMI more efficiently and economically than waiting until your home’s equity increases enough to trigger cancellation. This strategy could save money while speeding up cancellation requests.
Deliberately eliminating PMI may be beneficial to homeowners with less than 20% down or poor credit histories, however before investing money on home improvements to reach this goal it would be wise to consult a mortgage professional and ensure the strategy will fit with your particular financial circumstances.