What is private mortgage insurance (PMI)?
So, you’re ready to find a place to call your own but can’t quite afford that 20% down payment. PMI to the rescue! Private mortgage insurance is a type of insurance that lenders require when you put less than 20% down on your home’s purchase price. PMI works like a safety net for lenders on the off chance you don’t make the mortgage payments. While PMI increases the monthly bill, it helps make homeownership more attainable for lots of buyers. It can also kick in when you’re refinancing and you have less than 20% in home equity.
Is PMI required for every mortgage loan type?
PMI is typically connected with conventional mortgage loans and FHA loans.
PMI vs. MIP vs. MPI
You’ve heard about PMI, but how does this compare to other insurance types that may apply to other scenarios? It’s easy to get lost in the acronym shuffle, so let’s break down the differences.
| Insurance Type | Associated With | Purpose |
|---|---|---|
| PMI (Private Mortgage Insurance) | Conventional loans & FHA loans | Protects the lender if the borrower defaults on the loan when the down payment is less than 20% |
| MIP (Mortgage Insurance Premium) | FHA loans | Protects the lender, linked specifically to FHA loans when the down payment is less than 10% |
| MPI (Mortgage Protection Insurance) | Optional for any homeowner or loan type | Covers mortgage payments in case of the borrower's death or disability |
How much does PMI cost?
So, how much is mortgage insurance? For a conventional loan, on average, PMI costs range from 0.3% to 1.5% of the original loan amount per year. This means if you have a $200,000 loan, you could be paying anywhere from $600 to $3,000 annually for PMI. Yes, that’s a pretty big difference, so you’ll want to know how PMI will impact your mortgage payments before you agree to a lender.
Factors that impact the cost of PMI
Several factors can tweak the cost of your PMI mortgage loan payments:
- Loan amount and term: Larger loans and longer terms can mean higher PMI costs.
- Down payment: The more you put down, the less risky you are to lenders and the lower your PMI costs will be.
- Credit score: Higher credit scores can lead to lower PMI payments because they indicate that you're a reliable borrower.
- Loan type: Fixed-rate loans might offer lower PMI rates compared to adjustable-rate mortgages, which can be a bigger risk for lenders.
Types of private mortgage insurance
There are several types of private mortgage insurance that vary based on who is required to pay and when they should pay it.
Borrower-paid PMI
This is the most common type of PMI where you pay the mortgage insurance premium as part of your monthly mortgage payment.
Best for: Borrowers who plan to stay in their home for a long period and want to spread the cost of PMI across the life of the loan.
Lender-paid PMI
In this case, the lender pays the PMI premium, which often means a higher interest rate on your loan.
Best for: Borrowers who want to minimize their upfront costs and plan on refinancing or selling the home before the mortgage reaches its midpoint.
Single-premium PMI
This is where you pay a one-time upfront premium at closing, or you may be able to divide it between monthly payments.
Best for: Borrowers who have extra cash to spend upfront, which eliminates the need for monthly PMI payments.
Split-premium PMI
This is a middle-of-the-road deal that allows you to pay part of the PMI upfront and divvy up the remaining balance between monthly payments.
Best for: Borrowers who can afford some upfront payment but also want to keep their monthly mortgage payments lower.
Should you pay PMI?
Paying PMI isn't necessarily a bad thing. It can help you buy a home sooner without having to save for a 20% down payment. However, it does increase your mortgage costs overall. Consider whether the extra expense of PMI is manageable for you in the short term or if it might be more beneficial to delay your home purchase while you save for a larger down payment.
Is there a way to avoid paying PMI?
Trying to sidestep PMI? We get it. Here are a few strategies that can help:
- 20% down payment: Meet the 20% threshold to take PMI out of the equation.
- Piggyback loan: Take out a smaller loan to cover part of your down payment, avoiding PMI on your primary mortgage.
- Down payment assistance programs: Look for programs that help you meet the 20% down payment requirement.
- Government-backed loans: Find out if you qualify for a loan that doesn’t require PMI.
- Lender-paid PMI: If you can negotiate a good interest rate, lender-paid PMI may be the best route.
When can I get rid of PMI?
One thing to remember is that PMI isn't a forever fee. Once you’ve built up 20% in home equity, you can request to remove PMI. Your lender will typically require a good payment history and possibly a new appraisal to confirm your home’s value. This may differ with FHA loans.
PRO TIP
Under the Homeowners Protection Act, your lender is required to automatically remove PMI when your mortgage balance hits 78% of the original value, assuming you're current on your payments. The only exception to this is with an FHA loan.
