PMI rates depend on nine variables, such as your down payment size and loan type; usually fixed-rate mortgages carry less risk and require lower PMI premiums.
Increase the size of your down payment to reduce PMI costs. Also request that lenders cancel it once your home reaches 20% equity.
What is it?
Private mortgage insurance (PMI) protects lenders should you default on your loan and is typically included as part of monthly payments. Unlike homeowners insurance which protects you against property damage as well as from bankruptcy proceedings, PMI only protects the lender – not you!
PMI is usually required with conventional home loans with down payments below 20% of the purchase price, which can add significant costs. But there are ways around it, such as saving for a larger down payment or choosing another type of loan product.
VA loans stand out by not requiring PMI at all and offering lower interest rates than conventional loans. A higher credit score can help qualify you for lower PMI rates as it shows your risk to lenders is reduced. PMI cancellation can be requested once your loan balance reaches 80% of its original property value – although this typically requires another appraisal and upfront fee from your lender.
How much does it cost?
Your payment of PMI depends on your lender, mortgage type and home value; additional factors include loan-to-value ratio (based on down payment amount and credit score).
PMI costs typically range from 0.3% to 1.5% of your original loan amount each year and should be added into your mortgage payments accordingly. Your lender will break this cost down into monthly installments.
Choose to pay an upfront premium at closing instead of monthly PMI premiums if this saves you hundreds up front. Your Loan Estimate and Closing Disclosure will include this up-front premium as a line item in your monthly mortgage statement.
No matter how you pay your PMI premiums, it will eventually be cancelled once your equity has reached 20% or your LTV has fallen below 80%. Your mortgage servicer will notify you as soon as your home’s value reaches that threshold.
How do I get rid of it?
Under the Homeowners Protection Act, lenders are required to cancel private mortgage insurance (PMI) when your loan balance reaches 78% of original purchase price or when you build 20% equity in your home. You can request cancellation yourself or let it happen automatically.
To successfully cancel your LPMI policy, it’s essential that you meet certain criteria such as maintaining a stellar payment history (no payments 30 days late in the last 12 months and no 60-day late payments in 24 months) as well as showing evidence of increased property valuation through either paying for an appraisal at your expense or providing your lender with evidence such as tax records illustrating property assessments which increase over time.
Your mortgage payments could also help reduce LPMI faster by making additional mortgage payments – for instance by adding all or part of your tax refund to principal, or investing in home improvement projects that increase value while keeping loan balance constant. Each lender has different rules regarding what’s needed to reach 20% equity level and the payments necessary.
What are my options?
Many factors can determine your need for PMI and when to remove it. One major influencer is being able to make at least 20% down payment on a conventional mortgage; otherwise, savings more or reconsidering which home you wish to buy could help prevent needing PMI altogether.
Other variables that can have an effect on PMI costs are your loan type and credit score. Some lenders provide loans without PMI requirements, like government-backed FHA, VA or USDA mortgages; choosing a fixed-rate loan could further lower risk to lenders, thus decreasing your PMI costs.
PMI typically comes out of your monthly mortgage payments as an added fee, though you may have the option of making upfront or combination payments depending on how your lender presents the information in your Loan Estimate and Closing Disclosure document.