Some lenders provide conventional loans with smaller down payments that do not require PMI, though these often come with higher interest rates.
Your mortgage insurance premiums depend on your loan-to-value ratio and will differ depending on which lender you work with. Payment may come directly out of your monthly payments or up front as part of an upfront fee or added on as an add-on payment option. Usually, however, once you reach 22% equity you may request cancellation of mortgage insurance coverage.
What is PMI?
Mortgage insurance (PMI) protects lenders should you default on your loan. PMI is mandatory on conventional mortgage loans with down payments below 20%.
Choose either a monthly premium or an upfront premium payment option, with monthly premiums typically being included as itemized lines on mortgage payment breakdown (shown on Loan Estimate and Closing Disclosure), but these payments can eventually be cancelled once sufficient equity has been gained in your home.
Lender-paid PMI may be offered as an alternative to monthly borrower-paid options, though this will likely cost more and save time by eliminating a one-time upfront payment hassle. Although typically tax deductible, consult your tax professional as this may differ based on state or lender.
How much does PMI cost?
Lenders charge mortgage insurance (PMI) premiums to protect themselves against default risk. Since conventional loans with down payments of less than 20 percent pose greater danger, lenders must purchase this coverage to guarantee they receive payments on time.
Your credit score and history can have an effect on how much PMI costs. Lenders typically assess higher PMI premiums for individuals with lower credit scores due to having less faith that borrowers will repay what they borrow.
Other considerations include your loan-to-value ratio and type of property you’re financing – single family homes typically have lower PMI rates while multifamily and condo properties may have higher ones.
PMI costs can quickly add up over time, but you can reduce or eliminate them by building enough equity in your home. In most cases, lenders allow a borrower to request cancellation once their loan balance reaches 78% of original appraised value of their home – but if your servicer does not cancel PMI when this point has been reached then contact them to find out why not.
How do I get rid of PMI?
If you own a conventional mortgage, PMI will become obsolete once your loan balance falls to 80% or less of its original value. At this point, lenders typically stop charging monthly premiums; however, you can request to have it taken off prior to this milestone being reached.
Avoid PMI by making a 20 percent down payment, or using an 80/10/10 piggyback loan as an alternative strategy that simulates this requirement. Even if you do not have 20 percent saved up in savings, this strategy requires only making 10 percent on one of two loans as down payments.
Refinancing can help remove PMI early, but you must carefully consider its costs versus benefits before taking this route. Refinancing will typically involve conducting an appraisal that can cost several hundred dollars but could save on monthly PMI payments.
Can I cancel PMI?
Law dictates that lenders must cancel PMI when your loan balance reaches 78% of its original value or at the midpoint of your mortgage term, usually 15 years (for 30-year mortgages). Your annual mortgage disclosure will provide this date, but you can ask your servicer to cancel PMI earlier by submitting a written request for early cancellation. Furthermore, be sure to read over your contract carefully as your requirements may vary between lenders.
Other methods exist for avoiding PMI, including making a larger down payment or using a “piggyback loan.” The latter option entails taking out two mortgages simultaneously – one to cover most of the purchase price, with an 80-10-10 loan “piggybacked on top to cover any shortfall in payment.
Refinancing could also prove useful, enabling you to change the interest rate, lower monthly mortgage payments or drop PMI altogether. Just be sure to review your new mortgage contract for details regarding when refinancing is permitted.