PMI (Private Mortgage Insurance) is an additional monthly expense added to your mortgage payment that protects lenders against losses caused by borrowers who default on payments, making a common requirement of conventional loans that meet Fannie Mae or Freddie Mac criteria.
PMI may be paid either upfront at closing or as a monthly premium added to your mortgage payment, with cancellation taking place when equity reaches 20%.
What is PMI?
Private Mortgage Insurance, or PMI, is an optional form of supplemental loan insurance required by lenders for conventional loans with down payments of less than 20 percent. PMI protects lenders in case their borrowers default, paying back part of any remaining balance to them as compensation. PMI allows people to become homeowners with less of a down payment while possibly qualifying for conventional loans they otherwise wouldn’t.
PMI premiums typically become part of your mortgage payment. Sometimes it may also require payment in one lump sum at closing.
There are various strategies available to you in order to avoid paying private mortgage insurance (PMI), such as making a larger down payment and improving credit scores and debt-to-income ratios before applying for a mortgage loan. Refinancing into one with lower interest rates may also help; but beware: refinancing could raise payments, as some lenders charge PMI even after refinancing!
How much does PMI cost?
PMI costs can differ considerably, depending on factors like mortgage size and credit score. Typically, those with larger down payments and lower debt-to-income ratios pay less in PMI premiums; those with better scores also may qualify for more cost-effective premiums.
Property type can also have an effect on PMI costs; single-family homes usually have the lowest premiums while multi-family, condo and manufactured homes may incur higher premiums.
PMI costs can quickly add up, making it essential to consider when searching for a mortgage loan. Although its costs can be steep, many buyers accept it as part of homeownership. Remember, though, that PMI only protects your lender and not you personally if your payments fall behind; to safeguard yourself against foreclosure it’s essential to save up for at least 20% down payment or look into lenders that provide alternatives.
How do I get rid of PMI?
Though it may seem unfair that those making less than 20% down payments must pay mortgage insurance, there are ways you can eliminate PMI early and save yourself from its cost.
Under the Homeowners Protection Act, federal law mandates loan servicers automatically cancel PMI once your principal loan balance reaches 78% of original value (plus 22% equity), provided you remain current on payments and have an excellent repayment history.
Another option for canceling PMI is writing to your lender in writing to request its cancellation, with their manager or supervisor’s approval. In such an effort, be prepared to show proof of payment history as well as current value of property.
Refinancing can also help eliminate PMI costs; however, before taking this route it’s essential to review your budget and projected length of stay in order to determine whether refinance costs will justify themselves.
What are my options for getting rid of PMI?
There are multiple strategies available to you for canceling PMI. One is waiting until you have enough equity in your home to request that it be cancelled from your lender; typically this requires at least 20% equity and must be done so in writing.
Refinancing can also save money on your loan, though you must weigh the costs carefully as they could include closing costs and higher mortgage interest rates. “It is important to carefully weigh the benefits against costs when refinancing, considering how long you plan to be living there,” cautions Baker.
Consider Piggyback Mortgages, wherein you make a smaller down payment and then borrow additional funds to cover part of the purchase price – potentially lowering PMI costs while simultaneously adding to your overall debt load and monthly payments.