Private mortgage insurance protects lenders rather than borrowers. This enables lenders to accept more risk by accepting smaller down payments, giving more people an opportunity to become homeowners.
However, PMI comes at a cost to borrowers; typically until their loan balance reaches 78% of original home value (or until cancellation has been requested).
What is it?
PMI (Private Mortgage Insurance) is required on conventional loans when the borrower makes less than a 20% down payment, in order to increase home ownership among more buyers by taking out larger loans at reduced interest rates or having larger loans with longer payback terms; it also protects lenders in case their borrowers default.
Your mortgage, down payment and credit score all affect how much PMI you owe; in general, higher risk factors mean more expensive PMI premiums for you.
Your chances of avoiding PMI may improve by saving for a larger down payment, selecting an FHA loan, or opting for a piggyback second mortgage (wherein a smaller down payment on your primary loan and using equity from another line of credit or other sources to cover any remaining balance). Speak with your lender about all of these options.
How much does it cost?
PMI costs depend on factors like credit score, home value and loan type; however, you can usually estimate annual fees between 0.1%-2% of your original mortgage amount as annual fees added into monthly mortgage payments and displayed in your loan estimate/closing disclosure documents.
Your lender typically cancels PMI when your loan balance reaches 80% of original property value or when you reach the midpoint of amortization schedule (15 years on a 30-year mortgage loan). You can request cancellation on the basis of current value once loan balance reaches 78%.
If you request early cancellation, your lender may require a broker price opinion or appraisal to ascertain its current value. While this could add costs associated with refinancing, removing PMI could save on mortgage payments so it may be well worth your while to pursue this route.
How do I get rid of it?
Under federal law, your mortgage insurance should automatically expire once your principal balance reaches 78% of your home’s original value, whether that be its contract sales price or appraised value (or, if refinanced, new appraisal). Your lender may require proof of good payment history as well as certification that there are no other liens-including second mortgages-on your home before cancellation takes place.
Homeowners looking to reduce or get rid of PMI should also consider switching to a government-backed loan such as FHA or USDA mortgages, which tend to have less expensive fees and more accommodating terms regarding PMI than conventional loans.
Your mortgage servicer should offer you the option to discontinue PMI at any time; however, it typically requires either a broker price opinion (BPO) or appraisal at your expense – this could cost several hundred dollars upfront but could save hundreds over time.
What are my options?
PMI costs can either be added as an ongoing monthly premium to your mortgage payment or paid up front at closing, depending on your lender. Your annual costs depend on your loan-to-value ratio and original home value as determined through an appraisal or property valuation app such as Zillow; as your LTV decreases more quickly, so will PMI savings.
Your lender can assist with this calculation process and offer alternative ways to reduce or remove PMI altogether – potentially saving thousands over the lifetime of your mortgage! For example, using a piggyback loan entails making a smaller down payment and then taking out another, larger loan — usually an equity line of credit (HELOC) — as needed to cover any remaining balance. Your lender should be able to help with these calculations; inquire further regarding these solutions so as to save thousands over time!