Private mortgage insurance is paid by the borrower to protect the lender’s investment when the borrower makes a down payment of less than 20 percent on a home.
Although the standard mortgage down payment is 20 percent, most lenders will allow a smaller down payment.
If a borrower does not put 20 percent down, however, they are usually required to carry private mortgage insurance (PMI) to protect the lender against default. PMI requires an initial premium payment of 1 to 5 percent of your mortgage amount and may require an additional monthly fee, depending on your loan’s structure. On a $100,000 house with a 10 percent down payment, this would mean either an initial premium payment of $2,700 to $4,500, or a lower initial premium combined with a monthly payment of $25 to $30.
Private mortgage insurance makes it possible for people who aren’t able to make a 20 percent down payment to buy a home. However, these buyers may be considered a higher credit risk, so lenders have more reason to protect themselves from a loan default. Therefore, low down-payment buyers are usually required to get private mortgage insurance as a condition of the loan. The cost tends to vary depending on the size of the down payment, the type of mortgage and the amount of coverage the lender requires. In general, it’s about 1/2 of 1 percent of the value of the loan.
You may either pay the money up front, or make monthly payments as part of your mortgage payment. Sometimes, you can finance private mortgage insurance in exchange for a higher interest rate on your mortgage.
Once you have paid down the principal to 80 percent of the amount borrowed, you can contact your lender about canceling private mortgage insurance. If your home’s value appreciates you may be able to make this call even sooner. The lender may require you to pay for a new appraisal to confirm the home’s market value.
Cancellation is not automatic, even if you meet these criteria. If you have a poor credit history or high debt-to-income ratio, the lender may require you to continue carrying private mortgage insurance. Liens or other claims on your property also may prohibit cancellation of PMI.
In most cases, if you signed your mortgage on or after July 29, 1999, federal law requires your PMI be terminated automatically once you have paid principal equal to 22 percent of the original value of your home.
These protections do not apply to FHA or VA loans. If you obtained your mortgage after that date, the lender is required to provide a phone number you can call to ask about canceling PMI.
Although the law affects lenders and borrowers nationwide, some states have additional protections related to private mortgage insurance. Check with your state’s consumer protection agency for more details.
Private mortgage insurance generally costs hundreds of dollars a year and many thousands of dollars over the life of the loan, so it pays to stay on top of it and try to get rid of that extra cost as soon as possible.
