Pmi: A Lifetime Cost Or Temporary Expense?

Private mortgage insurance (PMI) is an extra expense for conventional mortgage borrowers who put less than 20% down payment for a home. It is a type of insurance that protects the lender in case the borrower defaults on their loan. While PMI is not a permanent fixture of a loan, there are various factors that determine when it can be removed. These include the type of loan, the loan-to-value (LTV) ratio, the borrower's credit score, and the midpoint of the loan's amortization schedule.

PMI is not permanent

Private Mortgage Insurance (PMI) is not permanent and can be removed under certain conditions. The removal of PMI is dependent on factors such as the type of loan, the loan-to-value (LTV) ratio, and the borrower's credit score.

For conventional loans, PMI is typically required when the down payment is less than 20% of the home's value. In this case, PMI can be removed once the borrower reaches 20% equity in their home. This is known as the midpoint of the loan's amortization schedule, which occurs when the principal balance reaches 78% to 80% of the original value of the home. At this point, the borrower can request their servicer to cancel the PMI. It is important to note that the borrower must be current on their monthly payments for PMI cancellation to occur.

Additionally, some lenders may have their own standards for PMI removal. For example, loan investors like Fannie Mae and Freddie Mac create their own PMI cancellation guidelines that may differ from the standard requirements. However, these guidelines cannot be less favorable to the borrower than the standard conditions.

For Federal Housing Administration (FHA) loans, Mortgage Insurance Premiums (MIP) are typically required instead of PMI. MIP usually lasts for the life of the loan, but it can be removed by refinancing into a conventional loan once sufficient equity has been built up. This is possible as long as the LTV ratio is at 80% or less.

Furthermore, there are different types of PMI, such as borrower-paid PMI and lender-paid PMI, which can impact the removal process. With borrower-paid PMI, the premiums are included in the monthly mortgage payments, and it can be cancelled upon reaching 20% equity. On the other hand, lender-paid PMI is included in the interest rate on the loan, and the main way to get out of it is by refinancing.

Overall, while PMI is not permanent, the specific conditions for its removal may vary depending on the loan type, the lender's standards, and the borrower's financial situation. It is always a good idea to consult with a real estate or mortgage professional to understand the specific requirements for PMI cancellation in your case.

How to remove PMI

Private mortgage insurance (PMI) is an extra expense for conventional mortgage borrowers who put less than 20% down payment for a home. While the borrower pays for it, PMI protects the lender, compensating for the extra risk assumed by extending a larger loan with a lower down payment.

Wait for Automatic Removal

Lenders are required to automatically cancel PMI when your loan-to-value (LTV) ratio reaches 78%. This happens when your mortgage balance drops to 78% of your home's original value or once you are halfway through your loan term, whichever comes first. You will receive a PMI disclosure notice when you close on your loan, which includes the date your PMI will end based on your regular on-time payments.

Request for Removal

You can request to cancel PMI when your mortgage balance reaches 80% of your home's value. If you don't make this request, your lender will automatically cancel it when the balance reaches 78%. You can increase your home's equity by making extra loan payments.

Refinance

If you have a loan with lender-paid PMI, you will need to refinance to get out of it. This involves checking your home's current market value to estimate your equity, reviewing your credit, and calculating the refinancing costs against potential savings from PMI removal.

Pay Off the Mortgage

Of course, paying off your mortgage entirely will eliminate PMI along with all other loan costs.

Increase in Property Value

You can submit a written request to your loan servicer to cancel PMI if you can demonstrate a significant increase in your property value. This can be achieved by building an addition to your home, reducing your mortgage with extra principal payments, or an overall increase in your neighborhood values.

It is important to note that PMI removal for FHA loans is more challenging than with conventional loans due to changes implemented by the FHA in 2013. For FHA loans originated on or after June 3, 2013, with a down payment of less than 10%, PMI is required for the life of the loan.

PMI costs

Private Mortgage Insurance (PMI) is an extra expense for conventional mortgage borrowers who put less than 20% down payment for a home. While the borrower pays for it, PMI protects the lender by compensating for the extra risk assumed by extending a larger loan with a lower down payment. The cost of PMI depends on several factors, including the size of the loan, the down payment amount, the debt-to-income ratio, the credit score, and the loan type.

The average cost of PMI for a conventional home loan ranges from 0.46% to 1.5% of the original loan amount per year, according to the Urban Institute's Housing Finance Policy Center. This range can be broken down into two main factors: the down payment and the credit score. A higher down payment will result in a lower PMI, while a higher credit score will also lead to a lower PMI cost. The down payment amount not only impacts whether PMI is required but also determines the premium amount. PMI fees typically range from 0.5% to 1.5% of the original loan amount per year, or $167 to $500 per month for a $400,000 mortgage.

The type of loan chosen also affects the PMI cost. Adjustable-rate mortgages (ARMs) carry a higher risk for lenders, so PMI may be more expensive than with a fixed-rate loan. Additionally, the debt-to-income ratio and loan-to-value (LTV) ratio play a role in determining the PMI rate. A higher debt-to-income ratio and a smaller down payment will generally result in a higher PMI rate. The LTV ratio measures the percentage of the home's purchase price financed against its value, so a higher LTV ratio leads to a higher PMI payment.

It is important to note that PMI is not a permanent cost and can be cancelled once certain conditions are met. Homeowners can request to cancel PMI when their mortgage balance reaches 80% of their home's value, and lenders are required to cancel it when the balance reaches 78% or when the loan term reaches its midpoint. For 30-year loans, this midpoint is after 15 years. Additionally, some lenders and servicers may allow the removal of PMI under their own standards, and loan investors like Fannie Mae and Freddie Mac may create their own PMI cancellation guidelines.

Lender-paid PMI

Lender-paid mortgage insurance (LPMI) is an option for borrowers who cannot afford a 20% down payment on a home. In this arrangement, the lender covers the cost of the mortgage insurance, which is reflected in a slightly higher interest rate on the loan. The cost of LPMI is woven into your mortgage interest rate, and you need to refinance or pay off your mortgage to get rid of it.

The main path to getting out of LPMI is to refinance. Instead of dividing payments into regular installments each month, single-premium LPMI bundles the entire cost of the premiums into one lump payment. Depending on the terms of the loan, you can either pay this in full at closing or roll the amount into the loan for a higher balance. If you pay it upfront, you’ll benefit from lower monthly mortgage payments.

LPMI generally has a much lower monthly cost but lasts for the life of the loan. It may be advantageous for homebuyers who plan to live in their home for a short period of time. If you plan to live in your new home for only a few years before selling, you likely won't get near the 20% equity mark needed to drop the monthly PMI.

LPMI coverage cannot be canceled and remains in effect until the loan is paid off or refinanced. The monthly premium option allows lenders to pay the monthly premiums and factor that cost into the interest rate they charge homebuyers on their loans, or they can charge an origination fee to cover the premium.

PMI and FHA loans

Private mortgage insurance (PMI) is an extra expense for conventional mortgage borrowers who put less than 20% down payment for a home. Although the borrower pays for it, PMI protects the lender, compensating for the extra risk the lender assumes by extending a larger loan with a lower down payment.

PMI is not the same as mortgage insurance premiums (MIP), which are charged on Federal Housing Administration (FHA) loans. FHA loans require an upfront mortgage insurance premium and MIP instead of PMI. MIP helps lenders mitigate the risk of providing mortgages to applicants with lower credit scores and smaller down payments.

MIP for an FHA loan is mandatory regardless of the amount of the down payment, and in most cases, you'll pay it for the entire loan term. However, some sources state that MIP on FHA loans is typically paid for 11 years or the lifetime of the mortgage. The cost of FHA loan mortgage insurance depends on the loan amount, the loan-to-value ratio ("LTV"), and the mortgage term. The upfront mortgage insurance premium is typically 1.75% of the base loan amount, paid at closing or added to the loan amount. The annual mortgage insurance premiums are also affected by the base loan amount, LTV, and mortgage term.

PMI, on the other hand, is generally in the range of 0.1%–2% of the loan amount per year and can be requested for removal once the borrower reaches 20% equity in their home. Lenders are required to cancel PMI when the mortgage balance reaches 78% of the home's value or when the borrower is halfway through the loan term, whichever comes first.

Frequently asked questions