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When you buy a home with a mortgage, you might find you need to pay for private mortgage insurance (PMI). Here’s a guide to what it is, how it works, how much it is and how long you have to pay it for.
What is private mortgage insurance (PMI)?
Private mortgage insurance (PMI) covers mortgage lenders in the event a borrower defaults on a loan. Although PMI covers the lender, you, as the borrower, pay the insurance, but only if you put less than 20 percent down on a home. If you put down 20 percent or more, you won’t have to pay this cost.
PMI won’t protect you from foreclosure, however. Rather, it allows you to become a homeowner without a 20 percent down payment. For this reason, PMI can be well worth the cost.
Another reason PMI works: You won’t pay it forever. Once you pay down your mortgage balance to 80 percent of your home’s value, you can request for your lender to cancel the insurance.
Note that “PMI” is the term used to refer to mortgage insurance on conventional loans. FHA loans also come with mortgage insurance premiums, but these are referred to as “MIP.”
How much does PMI cost?
The average monthly cost of PMI is 0.46 percent to 1.5 percent of the loan amount, according to an analysis by the Urban Institute.
Here’s a look at how PMI might play out based on how much you put down, according to the Freddie Mac mortgage insurance calculator and the Bankrate mortgage calculator. These examples assume a $410,000 home purchase price and a 6.68 percent interest rate. Note: The total monthly mortgage payments in this table don’t include homeowners insurance, HOA fees or property taxes.
|Down payment||5% down||10% down||15% down||20% down|
|Monthly PMI payment||$374||$240||$98||$0|
|Monthly mortgage payment||$2,508||$2,376||$2,244||$2,112|
|Total monthly mortgage payment||$2,882||$2,616||$2,342||$2,112|
Factors that influence the cost of PMI
- Your loan-to-value (LTV) ratio: The LTV ratio measures the percentage of the home’s purchase price you’re financing against the value of the home. The higher your LTV ratio, the higher your PMI payment.
- Your credit score: Your credit history and corresponding credit score play a major role in the cost of PMI. For example, with the above data from the Urban Institute of someone buying a $300,000 property with a 3.5 percent down payment. With an excellent FICO score of 760 or greater, the monthly mortgage payment including PMI is $2,018. For a buyer with a mediocre credit score between 620 and 640, those monthly payments are $2,269 — a reflection of a significantly higher PMI charge.
- Your loan type: Because adjustable-rate mortgages (ARMs) carry a higher risk for lenders, your PMI might be more expensive with an ARM than it might be with a fixed-rate mortgage loan.
How do I make PMI payments?
There are three primary schedules for making PMI payments. The options available to you vary depending on your lender.
- Monthly: The most common method is paying PMI premiums monthly with your mortgage payment. This boosts the size of your monthly bill, but allows you to spread out the premiums over the course of the year.
- Upfront: Another option is an upfront PMI payment, meaning you pay the full premium amount for the year all at once. Your monthly mortgage payment will be lower, but you need to be ready for that larger annual expense. Additionally, if you move sometime in the year, you might not be able to get part of your PMI refunded.
- Hybrid: The third option is a hybrid one: paying some upfront and some each month. This can be useful if you have extra cash early in the year and want to lower your monthly housing costs.
Different types of private mortgage insurance
When you come across the term “PMI,” it’s most often referencing borrower-paid PMI. With borrower-paid PMI, the premiums are part of your monthly mortgage payment, and you’ll be able to stop paying them once you pay down your loan balance to 80 percent of your home’s value. You’ll need to request the cancellation at this point, however. Otherwise, your lender will cancel PMI when your balance reaches 78 percent.
Lender-paid mortgage insurance might sound appealing, but make no mistake: You’ll still pay for the coverage. Instead of seeing that premium as a line item on your mortgage statement, you’ll pay a higher interest rate on the loan. You can’t get lender-paid PMI canceled in the same way that you can with borrower-paid insurance, either. The main path to getting out of lender-paid PMI is to refinance.
Instead of dividing up payments into regular installments each month, single-premium PMI 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 get the benefit of lower monthly mortgage payments. You might not have the funds to make this happen, however — plus, if you sell your home shortly after buying it, you might wind up worse off: You basically paid premiums in advance for nothing.
In a split-premium PMI arrangement, you’ll pay a larger upfront fee that covers part of the costs to then shrink your monthly payment obligations. This combines the pros and cons of single-premium and borrower-paid PMI. You need some cash, but not as much, to pay the upfront premium. You then benefit from lower monthly costs. Split-premium mortgage insurance can also be helpful if you have a debt-to-income ratio (DTI) that’s on the high side. It allows you to lower your potential mortgage payment to avoid pushing your DTI too high to qualify for the loan.
Do all lenders require PMI?
Virtually every lender requires PMI for conventional mortgages with a down payment less than 20 percent. Some lenders advertise “no-PMI” loans, but these are essentially lender-paid insurance arrangements — you’ll likely pay a higher interest rate in exchange.
Is there any advantage to paying PMI?
Paying PMI comes with one major benefit: It enables you to buy a home without waiting to save up for a 20 percent down payment. Home prices remain high, at a median $410,200 nationally as of June 2023, according to the National Association of Realtors. A 20 percent down payment at that price would be $82,000, which can seem like an impossible figure for many homebuyers.
Homeownership is generally an effective long-term wealth-building tool, so owning your own property sooner rather than later allows you to start building equity. If home prices in your area rise at a percentage that’s higher than what you’re paying for PMI, then your monthly premiums — costly as they are — are helping you net a positive return.
How to avoid paying PMI
- Put 20 percent down: If you put 20 percent down on a home, you’ll avoid the PMI expense altogether. That can be tough to save up for, however — down payment assistance might help.
- See if your lender offers piggyback loans: A piggyback loan, also known as an 80/10/10 or combination mortgage, takes the form of two loans: one for 80 percent of the home’s price, the other for 10 percent of the home’s price. You’ll then pay 10 percent as a down payment. The upside: You won’t pay PMI. The downside: The two loans could end up costing more than PMI in interest and closing costs.
- Get a VA loan: Mortgages guaranteed by the Department of Veterans Affairs (VA) don’t require PMI. If you’re a military veteran, active-duty service member or surviving spouse, you might qualify for a VA loan, which doesn’t require a down payment or PMI. (You’ll need to pay a funding fee, however.)
How to get rid of PMI
There are a few ways to get rid of PMI:
- Wait until it’s automatically canceled: Federal law dictates that your mortgage lender must automatically terminate your PMI once your LTV ratio drops to 78 percent. In other words, you’ll stop paying PMI when you have 22 percent equity in your home.
- Request PMI cancellation: Federal law also allows you to request that PMI be canceled when your LTV ratio hits 80 percent, or you have 20 percent equity in your home. You must submit your request in writing to your lender or loan servicer, and you might need to get an appraisal.
- Have your home reappraised: If you haven’t had your mortgage long, but you’re in a hot housing market, your home might have gone up in value enough for you to have 20 percent equity. To prove this, you’ll need to get your home reappraised.
FAQ on private mortgage insurance
Mortgage insurance protects your lender in the event you don’t pay back your mortgage. Homeowners insurance protects you and your home in case something happens to it. Lenders require mortgage insurance if you’re getting a conventional loan and putting less than 20 percent down; they also require homeowners insurance for any type of mortgage.
PMI was tax-deductible through the 2021 tax year. It expired for the 2022 tax year. The 2023 tax year guidelines have yet to be determined.
You’ll pay PMI until you’ve reached 20 percent equity in your home, or an 80 percent loan-to-value (LTV) ratio on your mortgage. Loan servicers must terminate PMI once you reach a 78 percent LTV ratio, based on the home’s original appraised value.
PMI protects a mortgage lender against the risk that a borrower will default on their loan. Mortgage protection insurance (MPI) protects the borrower by covering mortgage payments for a period of time if you become disabled or lose your job. MPI can also pay your mortgage off in the event of your death.
With reporting by Meaghan Hunt and Zach Wichter