Mortgage insurance (PMI) is usually required of conventional loan borrowers making down payments of less than 20%. Costs may either be added into monthly mortgage payments or paid upfront at closing.
Your credit score, down payment amount and loan type all play an integral part in determining the premium rates for PMI insurance policies. Keep an eye out for information regarding PMI in your loan estimates and closing disclosures.
How it works
Private Mortgage Insurance allows homebuyers with less than 20% down payments to secure financing without an unreasonable burden on the wallet. PMI costs vary based on loan type and down payment amount. Fixed-rate loans tend to incur less PMI expenses as their payments remain constant month to month, and larger down payments often have a lower debt-to-income ratio and thus reduced PMI rates.
Your lender typically charges private mortgage insurance (PMI) as a monthly premium that’s added to your mortgage payment and displayed on the Loan Estimate and Closing Disclosure’s projected payments section. An upfront premium payment at closing may also be due; many lenders allow cancellation when equity reaches certain thresholds or your loan-to-value ratio (LTV) drops below 80%, however cancellation based on natural increases to property value typically requires 2-5 years of payments before approval can be considered.
Your lender may allow you to pay PMI either upfront or as part of your monthly mortgage payment. Your loan size has an effect on its costs – larger loans tend to carry higher premiums – while credit history and scores have an effect; typically higher scores mean lower premiums since less risky borrowers.
Consider applying for a government-backed loan such as FHA or VA mortgage, which typically do not require PMI payments. However, certain criteria must be fulfilled to be eligible for one of these types of mortgage loans.
With a conventional mortgage, one way to bypass PMI may be making a 20%+ down payment or using something known as a “piggyback loan”, where an additional loan is taken out in order to reach this threshold. Once enough equity has been built up in your home, then this second mortgage may be removed and PMI eliminated from your mortgage loan contract.
Once your home equity increases sufficiently, you can request the cancellation of PMI; an expense you might not realize is eating away at your mortgage payment. Please be aware that termination can only be requested according to specific criteria established by your lender.
Lenders generally require that your loan has at least a minimum tenure or payment history and be free from liens such as unpaid contract work or second mortgages in order to qualify for PMI removal, known as seasoning requirements.
One way to eliminate Private Mortgage Insurance (PMI) costs when purchasing your home is making a larger down payment at purchase time, but that may not always be possible for first-time buyers or those on tight budgets. Luckily, lenders offer programs which enable buyers to put down smaller amounts and still avoid PMI completely; such programs help borrowers who might otherwise struggle afford a traditional mortgage to obtain one without incurring this additional monthly expense.
PMI costs should be carefully evaluated when shopping for mortgages. PMI premiums can add hundreds to your monthly payment and are usually paid as a percentage of loan amount; more down payment means lower loan-to-value ratio and, consequently, less PMI payments required.
Your credit score and home’s value also factor into PMI premium costs, with monthly installments becoming part of your mortgage payment or being made upfront if more convenient for you. Both options will increase interest charges; though paying monthly might make payments simpler.
Once your equity reaches 20%, you can request that your lender cancel PMI, potentially saving thousands in payments. Borrowers with Fannie Mae or Freddie Mac loans should have this done automatically when reaching this threshold.