How PMI Works: Everything You Need To Know About Private Mortgage Insurance



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Private mortgage insurance can help you buy a home without saving on the traditional 20% down payment. You will make the concession – pay the additional monthly mortgage insurance premium. PMI is required for conventional mortgages with lower down payments and can help new buyers become homeowners faster.

What is PMI and how does it work?

PMI gives buyers the option to purchase a home using a conventional mortgage at a lower cost than required. 20% down payment… PMI protects lenders offering financing options with a lower down payment. If you cannot make a 20% down payment, lenders consider you a riskier borrower with a higher probability of defaulting on your mortgage. If that happened, the lender could use the PMI escrow payments you paid before the default to recover some of their losses.

PMI cost

According to Freddie Mack, borrowers with PMI pay between 0.5% and 1.5% of the loan amount on average every year – or between $ 30 and $ 70 per month for every 100,000 borrowed. If you take out a $ 250,000 loan with a 5% down payment, PMI will add $ 1,188 to $ 3,563 per year, or roughly $ 100 to $ 300 added to your monthly mortgage payment.

How you pay PMI, monthly or annually, depends on the lender. Some may also allow you to make a partial down payment at close, which can lower your monthly or annual PMI payments.

How to fix a low PMI level

  • Credit rating: The higher your credit rating, the more likely you are to lock in a lower mortgage interest rate and PMI premium.
  • An initial fee: The closer you can get to a 20% down payment, the lower your PMI will be and the faster you can get rid of it.
  • Capacity: Owner-occupied properties receive lower PMI rates than rental or investment properties.

When can I stop paying PMI?

PMI is usually no longer required if you have at least 20% of the equity in your home – be it paying a principal or increasing the value of your home.

However, some lenders may have additional requirements that you must meet before meeting your PMI obligations. These can include making a certain number of mortgage payments, getting a new assessment, or paying less than 80% of the loan principal.

While the process may vary slightly depending on the lender, you can usually request Cancellation of PMI in writing after reaching 80% of the threshold value of the loan amount. You must meet certain requirements set by the Consumer Financial Protection Bureau, including:

  • Good payment history
  • Current loan status (not default)
  • Equity capital cannot be the subject of a subordinated loan.
  • Proof of value, if required (obtained through valuation).

Borrowers with Fannie Mae or Freddie Mac mortgages have a different threshold for PMI removal if the mortgage term is 2 to 5 years. For these borrowers, equity must be at least 25% before the PMI can be terminated.

PMI Benefits

While PMI adds additional costs to your monthly mortgage payments, it might be worthwhile in some cases. Here are some of the benefits of PMI:

  • You can buy a house earlier: For many would-be homeowners, the high down payment requirements make home ownership unattainable. With a down payment requirement of only 3%, borrowers can buy a home earlier.
  • You will be able to accumulate wealth faster: Owning a home can help increase your net worth. Buying a home earlier with PMI can also help you build capital faster, which in turn can help you get rid of PMI faster.
  • This is only a temporary cost: Once you reach your 80% LTV ratio (75% for Fannie Mae and Freddie Mac credits), you can request PMI removal. If you do not require it, lenders are required to automatically remove PMI upon reaching 78% LTV.
  • PMI is currently tax deductible: If you are filing a detailed tax return, you can deduct private mortgage insurance from your tax return by the end of 2021. This tax credit was reinstated in the 2020 Consolidated Supplemental Appropriation Act and extended to 2021 in the Consolidated Appropriation Law in January 2021. …

Disadvantages of PMI

While PMI can help you get a mortgage with a lower down payment, there are some disadvantages to consider.

  • This is an additional bonus: No matter how low your PMI interest rate is, you will still be paying additional expenses every month.
  • PMI numbers can be high: PMI rates are set based on your credit rating, home occupancy, down payment, and capital gains. A high PMI can increase your monthly mortgage payment more than you can afford.
  • Cancellation of PMI takes time: You are still required to pay PMI until the lender cancels it at 78% LTV. With an earlier cancellation request, you will often need to submit a formal written request, which can take time to process and delete. You may also have to pay for an appraisal if your lender requires it.

Do all mortgages require a PMI?

While PMI is usually only required for regular mortgages, other specialized types of mortgages have their own version – with their own set of requirements.

  • Ordinary mortgage: If you save less than 20% on a regular loan, expect a PMI payment. There are several non-PMI options, but these usually involve higher interest rates, which can end up costing you more.
  • FHA loans: FHA loans allow you to take loans of only 3.5% and receive a monthly insurance premium or MIP. Depending on your lender, your MIP may require an upfront payment at closing and monthly or yearly payments thereafter. Borrowers with a down payment of 10% or more will pay the MIP over 11 years, while borrowers less than 10% must pay for the entire loan term.
  • USDA credits: Although USDA loans do not require a down payment, there is a requirement for mortgage insurance with advance and annual payments attached. Upon closing, you must make an advance payment of 1% of the loan value, and an annual commission of 0.35% – annually. While USDA mortgage insurance cannot be canceled, it is generally more affordable than the FHA MIP and interest rates are generally lower.
  • VA Credits: VA loans do not require mortgage insurance, but borrowers will have to pay a one-time loan disbursement fee ranging from 1.4% to 3.6%, depending on the amount of the down payment. This commission can usually be included in the loan amount.
  • AWP loans: An ARM or adjustable rate mortgage can also include PMI. The initial cost may be higher, but you will be able to build capital faster, which will allow you to remove PMI faster than with a fixed rate mortgage.

Is PMI worth the cost?

There is a trade-off here. PMI increases your monthly mortgage payment, but may allow you to buy a home with a lower down payment. That being said, you can opt out of PMI if you get a different type of loan such as USDA, VA, or a regular non-PMI loan, or save up for a larger down payment. If you decide to go the PMI route, compare private mortgage insurance rates from different lenders before committing.


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