Private mortgage insurance (PMI) protects lenders in the event of borrower default by adding a monthly premium onto loan payments.
There are multiple strategies available to homeowners looking to forgo private mortgage insurance (PMI), such as saving for a 20% down payment or qualifying for an FHA loan with lower credit standards. PMI may also be cancelled once an owner has reached 20% equity.
It’s an insurance policy
PMI stands for Private Mortgage Insurance and it is designed to protect lenders against default on mortgage payments by homebuyers. Homebuyers must pay this premium each month, which can cost hundreds of dollars and helps borrowers qualify for conventional loans that would have otherwise been ineligible without it. There are different types of PMI available; some are paid upfront while others are added into loan payments over time.
The type of loan can also have an impact on how long a borrower must pay mortgage insurance premiums; an adjustable-rate mortgage’s PMI rates tend to be higher than fixed rate mortgages.
Some mortgages include an automatic PMI cancellation date; for instance, Fannie Mae mortgages automatically cancel after 22% equity has been attained on your original loan amortization schedule if you remain current on payments. Other lenders might require a broker price opinion to assess if your property value has dropped significantly and disqualify early PMI cancellation. Alternatively, PMI can be cancelled automatically as soon as your principal balance reaches 78% of appraised value, provided this feature is requested.
It’s a monthly payment
Most conventional mortgage lenders require that borrowers meet the criteria set forth by Fannie Mae and Freddie Mac, the government-sponsored enterprises backing these loans, in order to qualify for financing through Fannie Mae or Freddie Mac loans. The cost of PMI typically is passed along in monthly payments as shown on Loan Estimate and Closing Disclosure mortgage documents in the “projected payments” section; some lenders also permit a one-time premium payment at closing instead of incurring this monthly expense.
Homebuyers can often avoid Private Mortgage Insurance (PMI) by increasing their down payment or raising their credit score, and by requesting cancellation when their principal balance reaches 80% of original appraised value of property. Although lenders and loan servicers typically cancel PMI when an LTV ratio reaches 78%, so homeowners must monitor this figure. Refinancing could also help homeowners bypass PMI if their new loan has lower interest rates than existing one(s).
It’s a down payment
Mortgage insurance serves to safeguard lenders should you stop making your payments and end up in foreclosure. Usually required on conventional loans that meet Fannie Mae/Freddie Mac criteria (government-backed enterprises that back most mortgages), mortgage insurance enables borrowers without access to savings for a 20% down payment to still qualify for loans they wouldn’t otherwise get access to.
Your credit score and size of down payment both play an impactful role in determining how much Private Mortgage Insurance (PMI), typically paid monthly alongside mortgage principal and interest, you will owe. Your lender will inform you how much the monthly premium will be on your Loan Estimate and Closing Disclosure document before closing on a home.
Your loan type also determines how much PMI premiums you must pay; certain loan types carry greater risks than others, for instance adjustable-rate mortgages (ARMs) with variable rates can have higher monthly premiums compared to fixed rate loans.
It’s a risk
If you put less than 20% down when applying for a conventional mortgage, your lender will require Private Mortgage Insurance (PMI). This fee – not homeowners insurance – acts as protection in case you default and your home doesn’t cover enough of its debt repayment obligations.
Paying PMI typically involves rolling it into your mortgage payment after closing. Some lenders also allow a one-time up-front PMI premium at closing instead – you will see its amount on both your Loan Estimate and Closing Disclosure document.
Good credit history and score can help you secure loans with lower PMI rates, and making larger down payments will reduce lender risk. When your home reaches 20% equity (based on original sale price), you may request for your PMI payments to be removed early – your lender should request a broker price opinion in order to verify its value and determine your eligibility for early termination of PMI coverage.