Mortgage insurance is a fee charged to lenders to cover losses in case you default on your loan and is often mandatory with conventional mortgages that are backed by Fannie Mae or Freddie Mac, two government-sponsored enterprises that purchase and back loans.
PMI typically costs 0.2%-2% of your loan amount annually and must be included as part of your mortgage payment each month. There are two forms of PMI coverage: Mortgage Payment Protection Insurance and Personal Property Mortgage Insurance (PPMI).
What is PMI?
Mortgage insurance protects lenders in case of your failure to make your payments on time, typically required by conventional conforming loans backed by government-sponsored enterprises such as Fannie Mae and Freddie Mac, or featured with FHA loans.
You will usually pay either an upfront premium at closing, or an ongoing monthly premium that’s added onto your mortgage payment. (Alternatively, some premium may be split and paid upfront and others monthly.) To view your premium amount simply refer to either your Loan Estimate and Closing Disclosure document or Projected Payments section on your monthly mortgage statement.
Your credit score and down payment size both influence how much PMI you will have to pay; generally speaking, the higher your score and bigger down payment, the less PMI you will owe. Refinancing could eliminate PMI entirely but that depends on a variety of factors including length of stay in home, cost associated with refinancing process and whether or not you can afford increased payments post refinancing.
How much does PMI cost?
Cost of Private Mortgage Insurance varies greatly depending on home price, mortgage loan amount, down payment percentage and credit score. NerdWallet and Urban Institute mortgage calculators provide an estimate of how your PMI might play out in specific scenarios.
PMI costs can often be included as part of your monthly mortgage payment. Costs vary by state and lender.
Reduce PMI expenses by making a larger down payment, choosing an adjustable-rate mortgage or getting a piggyback mortgage, or purchasing a home less costly than the median listing price in your market.
Once you reach 20% equity in your home, you may request your lender to cancel PMI. In most cases, they’ll require an appraisal to assess its true market value first – an expense which could add hundreds to the bill.
How do I get rid of PMI?
There are various strategies you can employ to get rid of PMI, with two being automated cancellation. One option would be for it to expire automatically when your mortgage balance reaches 78% of original home value or when reaching halfway mark on term (e.g. the 15th year for 30-year mortgage loans).
Refinancing can also help qualify you for PMI cancellation, although this could prove expensive and inadvisable if interest rates have decreased since taking out your loan. You could request cancellation through your lender if substantial improvements such as remodeling have increased the value of your home (such as adding an extension). To do this, an appraisal would need to be provided as evidence.
Finally, another way of getting around PMI may be paying down your principal until it reaches 80% of either its original value or current market value (LTV), although this requires you to be current on payments and may require an appraisal as well.
When do I get rid of PMI?
Assuming your mortgage payments remain current, PMI should automatically stop when your principal balance reaches 78% of original home value or halfway through your loan term. You can request removal when home equity reaches 20%; however, an independent appraiser will need to confirm this level of home value has been reached before your lender removes PMI.
Borrowers may opt for Lender-Paid Mortgage Insurance (LPMI), which functions like regular PMI but with one important difference – lenders pay for it instead of you! Unfortunately, LPMI typically comes with higher interest rates, so be wary when considering your options before choosing this form of coverage. You could try speeding up the process of cancelling PMI by prepaying on principal. Doing this may reduce loan balance faster and help reach 80% LTV faster; however, mortgage industry professionals advise against this method due to rising home values reaching this mark sooner than anticipated.