Those financing their home with less than 20% down will often need to pay Private Mortgage Insurance (PMI), which helps lenders mitigate risks by making loans to people who wouldn’t otherwise qualify.
PMI may be cancelled once your loan balance reaches 80% of its original value or upon your request to do so. Payment of mortgage PMI depends upon multiple factors which go into calculating monthly mortgage payments.
What is PMI?
Private mortgage insurance (PMI) adds a monthly expense to your monthly mortgage payments, enabling lenders to accept smaller down payments and giving more people access to homeownership. But paying PMI often comes at the price of higher interest rates and payments.
Conventional mortgage lenders require PMI when you make a down payment of less than 20% or refinance with an LTV ratio exceeding 80%, while FHA and USDA loans also come equipped with their own versions of PMI coverage.
Most conventional mortgages come with two forms of PMI: borrower-paid mortgage insurance (BPMI) and lender-paid mortgage insurance (LPMI). BPMI is generally paid by homeowners and rolled into your monthly loan payment; LPMI may either be an upfront one-time fee at closing or integrated into the mortgage payments themselves. Both forms of PMI will typically be refunded or cancelled once equity levels reach 20 percent; cancellation may also happen automatically on single unit primary residences if certain requirements are met.
How much does PMI cost?
PMI costs depend on your lender’s analysis of the value and loan-to-value ratio of your home, known as LTV. Payment may be made monthly as part of your mortgage payment or upfront as one lump sum at closing; usually paying upfront will save money.
Insurance covers a percentage of lender losses should you default on your loan. For example, if your mortgage loan amount was $200K but your home has since decreased to $175,000 in value, 75% of that decrease in value will be covered by insurers as they help mitigate lender losses.
PMI may seem like an unnecessary expense, but it actually helps more people become homeowners by allowing them to purchase homes with smaller down payments and more quickly invest in real estate markets that appreciate than they could otherwise. Plus, PMI helps buyers get ahead in appreciating real estate markets before saving enough for 20% down payments is even possible!
How long do I have to pay PMI?
There are various factors that determine how long it will take you to pay Private Mortgage Insurance (PMI), including loan type and home equity. Some loans (such as fixed-rate mortgages) typically require lower monthly PMI payments since their lenders assume less risk with these types of loans.
Another factor is your loan-to-value ratio, or how much of the value of the home is borrowed in relation to its price tag. A high LTV typically necessitates paying private mortgage insurance until 80% of its original worth has been reached on your loan balance.
Some lenders offer a hybrid option called single-premium PMI that consolidates all upfront premium costs into one lump sum at closing rather than spreading them across monthly mortgage payments. While this strategy could substantially lower monthly mortgage payments, it may not justify spending additional upfront cash upfront for certain borrowers.
Can I get rid of PMI?
There are various strategies you can employ to end PMI coverage, and speaking to your mortgage lender about them would be wise. Your lender is required to cancel PMI when your principal loan balance reaches 78% of original appraised value if payments remain current; or alternatively you could submit written request and pay for an equity evaluation to request cancellation based on equity alone.
Another way to remove PMI is with a piggyback loan, in which you make a small down payment on your primary mortgage and then secure another mortgage (often through HELOCs) to cover the balance – helping you get past conventional loans’ 20% equity requirement. Rocket Mortgage does not yet provide this option, however. Alternatively, refinancing may save interest costs over time with its fee and appraisal requirements; refinancing often saves more.