Mortgage insurance is required on conventional loans with down payments under 20%, in order to protect lenders if borrowers do not make their mortgage payments on time.
PMI may be paid in either an upfront lump sum payment or as part of your mortgage monthly payments, with upfront premiums saving on closing costs but increasing monthly mortgage expenses.
It’s a type of insurance
PMI (or Private Mortgage Insurance) protects lenders in case borrowers default on their payments, typically on conventional loans without federal guarantees with down payments of less than 20 percent. FHA and USDA mortgages may have different PMI requirements.
Reduce your need for PMI by making a large down payment or paying an upfront premium. PMI costs typically run between 0.5% to 1% of the original loan amount annually; they could even be higher depending on other factors like having a smaller down payment, lower credit score or adjustable-rate mortgage loan terms.
Many loans set the automatic cancellation of PMI at 80% loan-to-value ratio; however, you can ask your servicer to cancel it earlier if necessary. They’ll likely request either a broker price opinion or appraisal of the property to verify whether it meets the desired value for PMI termination – though this could cost several hundred dollars more in payments over time.
It’s a cost
Mortgage insurance covers a percentage of lender losses in case of default, determined by several factors including your down payment size and loan balance, type of mortgage product chosen and credit scores (if applicable).
PMI premiums are typically paid upfront and added into your mortgage loan or monthly payments, since an adjustable-rate mortgage (ARM) carries greater risk for lenders. Your credit score plays a crucial role here too – those with scores of 760 or above often enjoy reduced PMI costs.
Your lender may cancel PMI from your monthly payments when the loan balance reaches 80% of its purchase price or you reach 20% equity in your home. They’ll conduct an appraisal to do this – which could cost several hundred dollars; but in hot real estate markets this process could become less costly as your home’s value may have increased enough that they don’t require as extensive an appraisal to do it.
It’s not forever
Private mortgage insurance often gets a bad rap, but it may help get you into your dream home faster than saving for 20% down payment. Plus, PMI helps make mortgages more manageable even if your credit score falls below 700 and shouldn’t last forever: under federal law lenders must cancel PMI when your loan balance falls to 80% of original value or half way point of the loan term whichever comes first.
Many homeowners can reduce or avoid paying their PMI premiums early by investing in home improvements or waiting for home prices to increase locally. To speed up this process, it may be worthwhile scheduling a professional home appraisal to ascertain how much your house is actually worth; although it could cost several hundred dollars or more initially, it could save hundreds of dollars over time in monthly PMI payments! Alternatively, ask your lender or loan servicer to remove it early – there may even be incentives offered!
It’s not required
Many homebuyers find private mortgage insurance (PMI) to be an unnecessary and annoying expense, yet it serves a very useful function: It allows buyers to secure mortgages quickly without waiting until they can save up 20% down payment money for a down payment of their own – without this option many could never have afforded the homes of their dreams!
PMI costs depend on several factors, including your credit score and down payment amount. As your risk becomes greater to lenders, your premiums become more costly. Some lenders also provide government-backed loans (FHA and VA), which typically have different eligibility criteria than conventional mortgages.
Your best chance at avoiding private mortgage insurance (PMI) payments lies in making regular payments until your equity reaches 20% or until your loan balance reaches 80% of original home value, or reaching out to your loan servicer and asking them to cancel PMI for you.