PMI (private mortgage insurance) is required if your down payment falls below 20%; this helps lenders recoup some of their investment should you default on your loan agreement.
Choose whether to pay the premium upfront or roll it into your monthly mortgage payments – your lender will give you this option when they give you their Loan Estimate and Closing Disclosure form.
How much does PMI cost?
There are various factors that determine your PMI premium costs, including loan type and your credit score. Fixed-rate mortgage loans tend to carry less risk for lenders and thus result in lower PMI costs; similarly, lenders tend to charge those with higher credit scores lower PMI rates because their loans are seen as being less risky to them.
PMI payments can either be added into your mortgage payment each month, or all at once at closing – which may increase closing costs but reduce monthly payments.
PMI payments depend on both the value of your home and size of your down payment; lenders provide loan-to-value calculators to assist in this calculation. Under state law, your mortgage servicer is legally required to cancel PMI when 22% equity or halfway through amortization schedule has been reached; you may request this cancellation earlier if possible to save costs.
Can I get rid of PMI?
To successfully cancel PMI, it is necessary to accumulate at least 20% equity in your home – this can be accomplished either through paying down your loan balance or increasing its value, according to Latham. Once this threshold has been reached, ask your lender about removing PMI.
One way to expedite the process is through major home improvements, provided you keep meticulous records and submit them to your lender, suggests Latham. Another strategy might be refinancing into a piggyback loan combining your first mortgage with another smaller one and helping reach that 20% mark faster.
Or consider government-backed FHA or USDA loans without PMI requirements; these typically have higher interest rates.
How do I know if I’ll need PMI?
Before applying for a mortgage loan, there are a few key points about PMI that you should keep in mind. Your type of loan and credit score could have an impact on how much PMI premium you will need to pay; for instance, fixed-rate loans reduce lender risk since interest rates won’t fluctuate, while having a higher credit score can qualify you for lower PMI premiums.
Another factor to keep in mind when purchasing your home is your down payment amount. A smaller down payment could increase lender risk as it takes longer for enough equity to build up to cancel out PMI premiums.
Lenders will either include monthly mortgage loan insurance premiums with your payments or pay an upfront premium at closing. When your equity levels increase enough to make refinancing possible, PMI payments can be avoided altogether by refinancing to avoid it; to cancel PMI entirely you will need to request its removal in writing from your lender.
What are the options for paying PMI?
PMI may be paid either with one upfront premium at closing or, more commonly, as part of your mortgage payment. This latter method is known as borrower-paid PMI and its amount will appear as part of your Projected Payments in your Loan Estimate and Closing Disclosure form.
Your choice of mortgage loan may also have an effect on PMI costs. Fixed-Rate loans tend to carry less risk than adjustable-rate ones and typically require lower mortgage insurance premiums. Some lenders also provide mortgages without PMI coverage, though they tend to come with higher interest rates.
Increased down payments can lower the costs associated with PMI. You will likely be eligible to cancel it when your loan-to-value ratio drops below 80% of original home value; however, sooner cancellation may be possible upon request from your lender – look for their annual mortgage statement for details.