Avoiding private mortgage insurance (PMI) is possible through various strategies. One is waiting until you have 20% down, or receiving an unexpected gift from family to cover any gaps in your down payment. Doing this can save you thousands annually in PMI premiums.
PMI applies to conventional mortgages backed by Fannie Mae and Freddie Mac, with either a one-off premium paid at closing or monthly premiums added into monthly mortgage payments.
Down payment
Private Mortgage Insurance (PMI) is an optional expense used by lenders to mitigate losses should a borrower default on his or her home loan. You can either pay it upfront, or add it as part of your monthly mortgage payments; adding it monthly increases its cost due to paying interest each month on it. Your down payment size and credit score both have an effect on how much PMI is needed; with 20% or higher down payments potentially eliminating or reducing need for PMI altogether and decreasing rates significantly.
Consider all costs related to homeownership before making this decision; waiting may lead to missed market appreciation opportunities and could increase risk associated with selling or refinancing in the future.
Credit score
Mortgage insurance costs depend on several factors, including home price, down payment amount and credit score. In general, higher credit scores and larger down payments lead to reduced PMI costs; it may even be possible to eliminate them altogether by paying down principal.
Prior to closing on a conventional mortgage loan, it is vitally important that you understand the costs of PMI. Your lender should include an estimate in your Loan Estimate and Closing Disclosure document or you can use a mortgage calculator to calculate these costs yourself.
Conventional lenders require PMI for the protection of both parties – not only is PMI not meant to help a borrower avoid foreclosure or decrease their credit score but it primarily protects lenders from losses due to missed payments from borrowers. Borrowers can avoid this cost altogether by making at least 20% down payments on their home purchase – typically this occurs once your loan balance reaches 78% of original value or halfway mark in mortgage term (your mortgage loan servicer should automatically cancel it after this threshold has been reached).
LTV ratio
Lenders carefully consider your loan-to-value (LTV) ratio when considering whether to approve your mortgage application, as this determines what percentage of the total purchase price of your home is being financed and impacts credit scores and PMI payments. Ideally, keep your LTV below 80% as this will reduce monthly mortgage payments while giving you more equity in your home.
An LTV ratio that exceeds 60% creates more risk for lenders as it increases the chance of borrowers owing more than their homes are worth. Therefore, they may impose stricter borrower requirements or increase interest rates to cover this increased risk.
Your LTV ratio can be reduced in several ways, such as making a substantial down payment and improving your credit score. Furthermore, waiting for property value appreciation and making additional principal payments may reduce it further. Alternatively, reaching out to lenders when your equity reaches 20% may enable cancellation of PMI coverage.
Cancellation date
PMI may be an attractive option for borrowers who cannot afford the 20% down payment required of other mortgage types; however, its long-term cost should be carefully evaluated. Furthermore, its presence may add an extra burden of homeownership costs such as property taxes and insurance premiums to monthly loan payments.
Borrowers may request their lender cancel PMI when their mortgage principal balance reaches 80% or 78% of its original value (for refinancing loans), provided they have an excellent track record with payments and do not have any subordinate liens on their property. Furthermore, mortgage servicers must verify its value through automated valuation models or broker price opinions before cancelling it altogether – and may require a borrower-paid appraisal for verification purposes.
Borrowers also have the option of selecting government-backed loans like FHA or USDA mortgages that do not require PMI but typically come with higher interest rates and fees associated with them.