Understanding Pmi: Decoding Mortgage Statements

Private Mortgage Insurance (PMI) is an insurance policy that protects the lender if a borrower defaults on a home loan. Lenders usually require PMI if the borrower puts less than 20% down on a conventional mortgage. The cost of PMI depends on several factors, including the size of the mortgage loan, the down payment amount, and the borrower's credit score. PMI is typically paid monthly as part of the mortgage payment, and the cost is listed in the Explanation of amount due section of the mortgage statement. PMI can be removed once the borrower has attained 20% equity in their home.

PMI is shown in the Explanation of amount due section of your mortgage statement

PMI, or Private Mortgage Insurance, is an insurance policy that protects the lender if a borrower defaults on a home loan. It is usually paid for by the borrower as a monthly premium that is added to their mortgage payment. The PMI cost is called a "premium" and is found in the "Explanation of amount due" section of your mortgage statement. It is included in your escrow payment, which goes to your escrow account. Your escrow account pays your PMI annually, along with your homeowner's insurance and property taxes.

The cost of PMI depends on several factors, including the size of the mortgage loan, the down payment amount, and the credit score of the borrower. The higher the credit score, the lower the PMI cost. The PMI monthly costs can range anywhere from 0.43% to 5.96% of the loan amount for fixed-rate mortgages, depending on how the borrower chooses to pay. The PMI cost is also influenced by the loan-to-value (LTV) ratio, which measures the loan amount against the value of the home. Lenders typically look for an LTV of 80%, achieved with a 20% down payment. A lower down payment results in a higher LTV ratio and the need for PMI.

PMI is typically required for conventional loans with a down payment of less than 20%. It can be avoided by making a larger down payment or by opting for certain types of loans, such as an FHA or USDA loan. Additionally, once the loan-to-value ratio reaches 78% of the original value, the PMI is automatically cancelled, and borrowers can request to have it removed earlier by submitting a written request to their lender.

It is also included in your escrow payment

Private Mortgage Insurance (PMI) is usually paid as a monthly premium, which is added to your mortgage payment. It is shown on your Loan Estimate and Closing Disclosure in the Projected Payments section. The PMI cost is found in the "Explanation of amount due" section of your mortgage statement and is included in your escrow payment, which goes to your escrow account.

Escrow accounts are used in two distinct ways in real estate: to hold the buyer's earnest money deposit once an offer on a property has been made, and as a part of your mortgage. When a buyer makes an offer on a home, the buyer will often put down a good faith deposit, typically between 1 and 3% of the sale price of the home, to show the seller that the buyer is serious about the purchase. This deposit is held in an escrow account until closing, when the funds can be applied to the buyer's down payment or closing costs.

If you are paying a mortgage on your home, escrow accounts are used to hold funds that will be used to pay your property taxes and homeowner's insurance premiums. Your lender or mortgage servicer will estimate your annual property tax liability and homeowner's insurance premium and then divide that number by 12. This number will be added to your monthly mortgage payment. As you make your monthly payments, the servicer will take the amounts earmarked for property taxes and homeowner's insurance and hold them in an escrow account. When your taxes and insurance premiums are due, the servicer will automatically make the payments or send you a check to make the payment yourself.

Escrow accounts are beneficial to both lenders and homeowners. They lower the risk to the lender by ensuring that property taxes and homeowner's insurance payments are made on time, thereby protecting the lender's investment. For homeowners, escrow accounts make budgeting and planning for these large payments automatic, eliminating the surprise of a large annual payment.

PMI is not tax-deductible on a personal residence

Private Mortgage Insurance (PMI) is an insurance policy that protects lenders in the event of a borrower defaulting on a conventional loan. It is usually required when the borrower's down payment is less than 20% of the property value. PMI can be paid through a one-time upfront premium or added to the monthly mortgage payments.

PMI is not always tax-deductible. While it was deductible for eligible years between 2018 and 2021, this legislation has since expired. For the 2022 tax year and beyond, PMI is not deductible. However, if you were eligible for the PMI tax deduction in previous years but did not take it, you may be able to amend old returns and claim it retroactively.

It is important to note that the eligibility criteria for the PMI tax deduction included restrictions. For example, the deduction only applied to refinanced funds up to the original loan amount and not any additional funds borrowed. Additionally, the deduction was not allowed for taxpayers with an adjusted gross income (AGI) over a certain threshold.

While PMI is not currently tax-deductible, homeowners may benefit from other tax deductions, such as the yearly mortgage interest and state and local real estate taxes, within certain parameters.

You can avoid PMI by making a 20% down payment

Private mortgage insurance (PMI) is an added cost that homebuyers must pay if they purchase a home with a down payment of less than 20%. It is a type of insurance that protects the lender in case the borrower defaults on the loan. The cost of PMI is found in the "Explanation of amount due" section of your mortgage statement and is included in your escrow payment. The premium is added to your mortgage payment.

You can avoid paying PMI by making a 20% down payment. This is the traditional method of avoiding PMI. By making a 20% down payment, you are reducing the risk of default, which is why lenders require PMI when a buyer cannot put down at least 20% of the home's price. For example, if you purchase a home for $300,000 and make a 10% down payment ($30,000), you would typically be required to pay PMI. To avoid this, you would need to increase your down payment to at least $60,000 (20% of the home's purchase price).

Making a 20% down payment can also result in a lower interest rate on your mortgage. Additionally, once your loan-to-value ratio becomes 78% of the original value on a conventional loan, the PMI is automatically cancelled.

If you are unable to make a 20% down payment, there are other options to avoid PMI, such as a piggyback loan, borrowing from other sources, or a no-PMI loan where the lender pays the PMI in return for a higher interest rate.

You can also request to cancel PMI once you have 20% equity

Private Mortgage Insurance (PMI) is added to your loan when you make a down payment of 20% or less. It can significantly increase your monthly mortgage payment, so it's beneficial to know how to remove it.

Once you have reached 20% equity in your home, you can request to cancel your PMI. This is because a higher equity stake in your home lowers the risk of your mortgage, and so the need for PMI is reduced. You can reach this 20% equity faster by making extra mortgage payments.

To cancel your PMI, you must submit a formal written request to your lender. A home appraisal may be necessary to demonstrate your 20% equity, but you should wait for your lender to order this. These appraisals can cost anywhere from $650 to $2,200, depending on the square footage of your home. If your lender refuses to drop your PMI, you could consider refinancing your mortgage with a different lender, who will use the new appraised value.

You can also increase your home's equity by investing in home improvements. If you have made home improvements, you can request PMI removal as long as you have 20% equity.

Frequently asked questions