When a homebuyer makes a down payment of less than 20 percent, the lender requires the borrower to buy private mortgage insurance, or PMI. This protects the lender from losing money if the borrower ends up in foreclosure. PMI also is required if a borrower refinances the mortgage with less than 20 percent equity.
How much is PMI?
PMI fees vary from around 0.3 percent to about 1.5 percent of the original loan amount per year, depending on the size of the down payment and the borrower’s credit score. Mortgage insurance paid in 2017 is tax-deductible, but it remains to be seen whether Congress will renew the deduction for 2018. The Trump administration is overhauling the tax code.
Why wait to buy the house you want? Mortgage rates are low but on the rise..
|Based on purchase of a $200,000 house with a 10 percent down payment, borrowing $180,000. Buyer has a 770 credit score.
*Rate varies according to size of down payment, credit score and insurer.
|Insurance rate||0.3% per year*|
Source: Bankrate.com, Radian mortgage insurance calculator
Most PMI policies require the borrower to pay monthly. Borrowers also have the option of paying for mortgage insurance with a large upfront payment.
PMI can be canceled with enough equity
Your lender must automatically cancel PMI when your outstanding loan balance drops to 78 percent of the home’s original value. This probably will take several years.
You can speed up the cancellation of mortgage insurance by keeping track of your payments. Once the loan balance reaches 80 percent of the home’s original value, you can ask the lender to discontinue the mortgage insurance premiums.
To put it another way: You can request cancellation of mortgage insurance when the loan-to-value ratio drops to 80 percent. The lender is required to cancel PMI when the loan-to-value ratio drops to 78 percent.
The loan-to-value ratio, or LTV, describes mortgage debt as a percentage of how much the home is worth. It is a financial term used by lenders.
Formula: Mortgage amount owed / Appraised value
Example: Alex owes $60,000 on the mortgage. The house is worth $100,000.
$60,000 mortgage balance / $100,000 = 0.6. This means that Alex’s loan-to-value ratio is 60 percent.
FHA loans have different requirements
Recent FHA-insured loans require payment of mortgage insurance premiums for the life of the loan.
Federal Housing Administration mortgage insurance premiums can’t be canceled. Instead, you have to refinance the loan. Read “7 crucial facts about FHA loans.”