PMI allows homebuyers with less than 20% down payments to obtain mortgage loans with just an intermediate down payment, providing essential support for those unable to save enough for a larger down payment upfront. But PMI comes at a price.
At times, private mortgage insurance costs, also referred to as premiums, will be added onto your monthly mortgage payments. Your lender should list this in your Loan Estimate and Closing Disclosure under “projected payments”.
What is PMI?
PMI helps lenders manage risk by offering mortgage insurance that protects against losses caused by defaulting borrowers. While PMI costs can add hundreds to monthly mortgage payments, homebuyers who put down 20% or more are generally exempt from paying this fee; lenders will typically include it along with estimated costs in their Loan Estimates and Closing Disclosures that borrowers can review prior to closing.
Some borrowers opt to pay their PMI premium as part of their closing costs, which may reduce monthly mortgage payments. Others use a “split premium,” paying part upfront and the remainder over time through mortgage payments. When this occurs, homeowners may request their lender or servicer cancel it once their outstanding principal balance reaches 78 percent or halfway point in loan term.
How much does PMI cost?
Your lender charges PMI as an annual premium added to your monthly mortgage payment, and its amount depends on factors like loan size, down payment amount and your credit score.
Assuming you can afford a 20% down payment, the more money you put down will bring down PMI premiums; but for homebuyers unable to save up enough savings for this, PMI may be an additional expense that must be covered.
Lenders offer different rates for Private Mortgage Insurance (PMI), so it is wise to shop around. They could potentially save you money through using another PMI provider or creating more aggressive loan programs.
Once your loan balance has dropped below 80% of the original purchase price and you have gained 20 percent equity, you may apply for cancellation of PMI. To do this successfully, submit a written request that demonstrates all payments are current with no junior liens against the property.
Can I get rid of PMI?
Once your mortgage balance reaches 78% of its original value or it reaches the halfway mark on its amortization schedule (for a 30-year loan, this would occur after 15 years), federal law mandates your lender automatically cancel your Private Mortgage Insurance (PMI). However, you can ask them to remove it earlier by making a written request with them.
Your PMI could also be removed more quickly by making additional principal payments and paying for an appraisal to verify its higher appraised value (be sure to discuss this plan with your lender beforehand so they are properly credited).
Refinancing can incur host fees and closing costs, so to determine its worth it it’s essential to perform a cost-benefit analysis before refinancing to eliminate PMI. Refinancing should only make sense if savings outweigh closing costs over the course of your loan term – NerdWallet’s mortgage calculator can help you calculate these numbers accurately.
How do I get rid of PMI?
Though mortgage insurance (PMI) may seem like an expensive penalty, there are ways to either lower or eliminate it entirely. One such method is making a 20% down payment to bring down your LTV below 80% and eliminate mortgage insurance altogether. Refinancing may save hundreds of dollars monthly but may incur associated fees.
At 78% of original value of your home or when reaching halfway point on amortization schedule (for instance 15th year for 30-year loan). Submit this request in writing and ensure it meets with lender requirements such as strong payment history and no liens against property and independent appraisal that fits their criteria.
If your credit score improves significantly or home values increase significantly, PMI could be removed without refinancing. Speak with your lender today about this option.