PMI (Private Mortgage Insurance) is often required when borrowing home, even with 20% down payments. Your lender may charge either an upfront premium at closing, or add it into your mortgage payments each month.
Your lender can cancel PMI when your equity reaches 20% or when your remaining mortgage balance reaches 80% of its original loan amount.
What is PMI?
PMI stands for Private Mortgage Insurance, or PMI for short. It serves to protect lenders in case of defaulting borrowers and is usually required on conventional mortgages that meet standards set by Fannie Mae and Freddie Mac – two government-sponsored enterprises that back most U.S. loans.
How much PMI premiums you must pay depends on a range of factors, including your down payment and credit score. A larger down payment reduces risk to the lender and may result in lower premiums; an excellent credit score also shows you’re a responsible borrower who pays all bills promptly.
PMI typically comes as part of your closing costs or monthly mortgage payments, or can be added onto them individually. A split-premium mortgage insurance option could save upfront fees; however, this could increase monthly costs. When reaching 20% equity in your home you may request to stop paying PMI altogether.
How does PMI work?
Lenders typically provide their borrowers with two options for paying premiums: in one lump sum at closing or monthly. Paying monthly adds a small amount to each mortgage payment but increases total loan costs over time. Ask lenders for detailed pricing of both options to assist borrowers in choosing which is the most advantageous one for them.
Some borrowers may be eligible to avoid PMI by making a larger down payment or taking out a piggyback loan; however, these solutions add costs and shouldn’t be seen as the answer by most homebuyers.
Refinancing can also help you avoid PMI, though be mindful that refinancing can come with its own set of expenses and take time. Speak with your lender about its benefits and costs to determine whether this move is the best decision for you – compare costs against potential benefits such as lower interest rates or new terms when making this decision.
How do I get rid of PMI?
There are various methods available to you for canceling PMI on conventional mortgages. One way is when your principal loan balance reaches 80% of its original purchase price or when you reach an expiration date on the PMI disclosure or provided by your lender (usually two years post origination).
Your repayment of principal and mortgage balance early can be expedited by making extra payments towards principal, as well as paying it off faster than necessary. You could also ask your lender to reappraise your home after its value has increased – this service differs from initial appraisal done at closing – which might prompt them to remove PMI earlier than expected.
Another option is refinancing your mortgage into two loans; when considering this strategy it is worth weighing whether the savings from eliminating PMI outweigh any associated refinance costs such as loan fees and annual mortgage insurance premiums. When living in your house for an extended period, it may be advantageous to pay these expenses outright rather than accumulate them as savings.
What if I don’t have a 20% down payment?
A 20% down payment requirement may be an important goal of home buyers, but that should not deter people from realizing their homeownership dreams. There are a number of mortgage options that don’t require 20% as part of a down payment at all, such as government-backed loans such as FHA or USDA which come equipped with their own forms of mortgage insurance that operate differently from PMI.
Enhancing your down payment or increasing your credit score can help reduce PMI premiums. Lenders tend to charge higher PMI rates for people with lower credit scores as they have less faith that these borrowers will repay their debts in full.
“Overpaying” your mortgage each month is another effective strategy for avoiding PMI costs, and can save thousands in interest charges over its lifecycle. But be wary; doing this can increase debt levels and risk foreclosure – before considering this approach, speak to a lender first.