Private mortgage insurance is required on loans that meet Fannie Mae and Freddie Mac guidelines, protecting lenders against losses should their borrowers default.
Typically, mortgage insurance premiums are added onto your monthly payments; however, you may opt to pay an upfront premium at closing instead.
What is PMI?
PMI stands for Private Mortgage Insurance and protects lenders against losses should you default on your loan. It is required for conventional conforming loans and available through private companies who fulfill criteria set by Fannie Mae and Freddie Mac – government-backed enterprises who back many mortgages.
Your PMI payments typically appear as part of your mortgage payment each month; however, depending on your lender and type of mortgage loan product, PMI could also be paid upfront at closing or added onto the total loan balance.
Reduced mortgage insurance payments (PMI) may be achievable through increasing your down payment, improving credit, or shortening loan terms. Your PMI payments typically cease once your loan-to-value ratio reaches 80% of original home value or when requested to be cancelled, provided payments remain current; although new appraisal may be necessary.
How much does PMI cost?
The cost of PMI may differ depending on several factors:
Your Credit Score and Down Payment – Making a larger down payment may lower lenders’ risk perception, and consequently reduce your mortgage insurance premiums.
Your loan type – adjustable-rate mortgages (ARMs) typically carry higher interest rates and pose greater risk to lenders, leading to a higher PMI premium rate with these loans than fixed rate loans.
PMI payments should be included as part of your mortgage payment each month; however, you have the option to pay all the annual premium upfront at closing instead.
Refinancing with a lender that does not require PMI can also hasten your efforts toward eliminating it more quickly, having your home appraised for more than its original value, or paying more on your mortgage to build equity faster. Your lender is required by law to cancel PMI once your loan-to-value ratio reaches 80% of original value of your home.
How do I get rid of PMI?
Although refinancing solely to drop PMI may not be optimal, the Homeowners Protection Act allows you to request your lender cancel it when your loan-to-value ratio hits 80% of original value of your home. While requesting this may require new appraisal fees and save hundreds per month in mortgage payments.
Your lender typically charges either a monthly premium or upfront premium that’s added onto your total mortgage payment. To avoid PMI altogether, consider making a larger down payment as this will reduce how much money is lent out from you lender.
Speed up the timetable for eliminating PMI by channeling any extra funds toward paying down mortgage principal. Just make sure your lender knows you want this extra money used towards principal reduction and they have a way for tracking it – many lenders provide space on statements or online where you can direct it this way.
When do I get rid of PMI?
Federal law mandates that lenders cancel PMI on conventional conforming loans (the most popular mortgage type) when your loan balance reaches 78% of original value, though this date can differ depending on loan type or duration.
Inflation could help you reach that 78% mark more quickly than you expect, particularly if home prices have gone up since you secured your loan. To expedite this process, request that your lender evaluate whether PMI cancellation would apply based on home value increases; or refinance into a conventional loan to bypass it completely.
Piggyback refinancing may also help remove PMI by taking out a mortgage to cover 80% of your home’s value and then funding any remaining balance with another mortgage product like home equity loan or line of credit. Although this method is more costly, it allows you to avoid PMI payments sooner by refinancing now rather than waiting for home values to appreciate and eliminating PMI payments altogether later.