Mortgage insurance can become an additional expense over time. Lenders use it to protect them if you stop making your payments and help recoup losses, should this happen.
Cost of PMI depends on both your loan-to-value (LTV) ratio and credit score; making larger down payments will reduce LTV ratio and ultimately save money over time.
What is PMI?
PMI stands for Private Mortgage Insurance and serves to protect lenders against the risk of loan default. Conventional loans with down payments below 20% require PMI; however, making larger down payments and improving your credit can allow you to avoid it entirely.
Lenders determine your need for PMI by considering your loan-to-value (LTV) ratio – this ratio represents how much of your mortgage debt compares with its value – as determined by factors like down payment size and mortgage amount owed, credit score and debt-to-income ratio.
PMI costs will be added to your monthly mortgage payment and is usually detailed on page one of your Loan Estimate and Closing Disclosure under Projected Payments. Alternatively, an up-front premium at closing could also be required or you could split it between two payments; you should contact lenders so they can show you detailed pricing so you can choose the option best suited for you.
How much does PMI cost?
PMI costs will vary based on factors like your down payment size and credit score as well as loan-to-value ratio; typically those with smaller down payments and higher debt-to-income ratios pay more in PMI premiums.
PMI only applies to conventional conforming loans backed by Fannie Mae or Freddie Mac. You’ll see your monthly PMI costs listed on your Loan Estimate, provided prior to closing on your home.
To avoid paying PMI entirely, start saving for a larger down payment well in advance of applying for a mortgage loan. Prepaying principal can also help decrease overall balances while saving on interest payments; your lender should provide an amortization schedule showing when your balance reaches 80% of original property value and when to request PMI cancellation as this milestone approaches.
How do I get rid of PMI?
There are various strategies you can employ to reduce or remove PMI payments. One way is waiting until your home equity reaches 20% before asking your lender to eliminate it from your mortgage payments.
Refinancing into a conventional loan with lower LTV ratio may also allow you to avoid PMI; however, keep in mind that this option may come with additional closing costs and higher interest rates.
Finally, you may try convincing your lender to drop PMI based on extra payments you’ve made or an increased value in your home. An appraisal may be required; free tools like Zillow’s Zestimate may assist in estimating its current worth.
Keep in mind that your lender reserves the right to deny your request to drop PMI if certain criteria aren’t met, so do your research and understand all available options before trying to make a change.
Why do I have to pay PMI?
Conventional lenders usually require Private Mortgage Insurance when homebuyers make down payments of less than 20% on their home loans, so saving enough to reach 20% down payment and avoid PMI can help buyers take advantage of better mortgage terms and avoid PMI altogether.
Borrowers can lower their Private Mortgage Insurance costs by selecting a shorter mortgage term and making additional monthly payments to reduce principal balance faster, or both. Their credit score, loan-to-value ratio and down payment size also play a factor.
Most homeowners can have their PMI removed once their equity levels reach 78% of original property value; however, refinancing may incur costs and might make your new home more costly if the change in interest rate is excessive; make sure to discuss this matter with your lender for best results.