Private mortgage insurance (PMI) is required on conventional loans with less than 20% down payments to protect lenders in case of default on your home loan agreement.
PMI insurance typically becomes unnecessary once you’ve achieved 20 percent equity in your home, though increasing credit score and making larger mortgage payments may help accelerate this process.
How PMI works
Private mortgage insurance (PMI) protects lenders, not you, in case of defaulting on your home loan. Typically required for conventional loans with down payments below 20% and can be paid either as an annual premium, an up-front lump sum payment, or through markup added onto your interest rate.
Your credit score, down payment amount and lender requirements all influence how much PMI you will pay; lenders should provide detailed pricing options.
Make an extra deposit, save for a larger down payment or qualify for an FHA loan without PMI requirements if possible, or consider taking out two mortgages with equal monthly payments to cover the purchase price and then reduce one mortgage’s PMI by paying down its principal balance to 80% of original appraised value and paying it down that way.
How it’s calculated
Private Mortgage Insurance, or PMI, is an additional cost associated with your mortgage loan that serves as an insurer’s fee in case you default on your payments and is often required as part of conventional loan programs for homebuyers who make less than 20% down payments.
The premium can either be paid upfront or added as part of your mortgage payment and may have an effect on how much house can afford. Rates also vary by state and lender.
If you want to lower your PMI payments, try increasing the size of your down payment or considering alternative types of mortgage loans, such as FHA or HomeReady loans that require smaller down payments but come equipped with cancelable PMI that allows for faster equity accumulation. When speaking to lenders about these programs, ask for pricing details; they’ll also help calculate when your PMI will automatically be cancelled.
What’s the difference between PMI and private mortgage insurance (PMI) cancellation
Today’s mortgage industry expects certain borrowers to purchase PMI (private mortgage insurance), or payment default insurance (PDI), on loans with less than 20% down payments. PMI serves to protect lenders should you default on your loan agreement.
PMI costs can often be added into your mortgage payment as a monthly premium; you can find this information in your Loan Estimate and Closing Disclosure mortgage documents under “Projected Payments.” However, some lenders also allow an up-front premium payment at closing as an alternative method for covering PMI costs.
Reducing or cancelling PMI could free up extra funds that can help you reach other financial goals and priorities. One major advantage is reduced monthly mortgage payments – potentially hundreds each month! Removing it also helps build home equity faster by decreasing outstanding loan balances faster; for more details about cancelling this policy contact your loan servicer today.
How to get rid of PMI
At least, borrowers have the power to cancel their PMI before it automatically terminates – typically once their principal balance reaches 80% of original home value and loan disclosure statement is updated by lender or servicer.
There are two primary types of PMI coverage available to borrowers and lenders alike: borrower-paid PMI (BPMI) is added directly to your monthly mortgage payment; lender-paid PMI (LPMI) will be included as part of your loan closing as an upfront premium payment.
Assuming you qualify, PMI can be avoided by purchasing or refinancing with a down payment of 20% or less or refinancing into a conventional loan that meets Fannie Mae and Freddie Mac guidelines, though refinancing may come with its own set of strings attached (e.g. higher interest rate) so it is wise to carefully weigh all options available to you before committing. In addition, paying extra toward mortgage payments may speed up reaching 80% equity faster which in turn could trigger its termination sooner.