Should I Pay PMI Upfront or Monthly?
Private mortgage insurance, or PMI for short, protects your mortgage lender from loss if you stop making payments on your loan. Paying upfront PMI gives you the opportunity to take care of your mortgage insurance before you start making monthly mortgage payments, but the added cost at closing could be the deciding factor. Here’s what you need to know about paying upfront PMI.
- Understanding the 4 types of PMI payments
- Pros and cons of upfront PMI
- Should I pay PMI upfront or monthly?
- FAQs about PMI
Understanding the 4 types of PMI payments
When you make a down payment of less than 20% toward your home purchase, you’ll be required to pay for private mortgage insurance to account for the higher risk your lender takes on.
There are four different ways to make PMI payments:
- Monthly premium. This is the most common way to pay for PMI. The premium amount is added to your monthly mortgage payment.
- Single premium. This is also referred to as upfront PMI. It’s paid in one lump sum at your mortgage closing.
- Lender-paid premium. Under this option, your lender agrees to cover your PMI payment at closing. In exchange, they’ll slightly bump up your mortgage interest rate.
- Split premium. You’ll pay a portion of your PMI upfront at closing, and the remaining premium amount with your monthly mortgage payments.
Pros and cons of paying PMI upfront
Paying your PMI upfront has benefits and drawbacks. Be sure to consider them both as you decide whether paying PMI this way makes sense for your situation.
- Your PMI cost is taken care of at closing. Choosing upfront PMI means you’re responsible for paying the total cost at the closing table. This is in addition to your other mortgage closing costs.
- No extra charges are added to your monthly mortgage payment. Since you’re paying a lump sum upfront, there’s no need for your lender to add a monthly PMI premium to each mortgage payment.
- You won’t have to request PMI cancellation later. Opting for a monthly premium means you may have to request PMI cancellation once you have enough equity, or wait for it to automatically terminate once your loan-to-value ratio (LTV) hits 78%. This isn’t a concern when you make an upfront PMI payment.
- You’ll pay more money at closing. Upfront PMI will likely cost you several thousand dollars, and it must be paid as part of your closing costs.
- If something changes, you’ll lose the money paid. If you decide to refinance your mortgage or sell your home, you’ll lose the money you paid for upfront PMI.
- You could miss out on potential tax benefits. Should the federal government decide to reinstate the mortgage insurance premiums deduction, you wouldn’t be able to take advantage of deducting your PMI payments from your taxable income.
Should I pay PMI upfront or monthly?
Paying upfront PMI means you knock out your mortgage insurance obligation before you start repaying your loan. However, your ability to pay the extra cost at closing is a key factor to consider.
You can avoid a monthly PMI payment altogether by:
- Opting for lender-paid PMI, with the understanding that your mortgage rate and overall loan costs will be higher.
- Choosing a piggyback loan arrangement, where you finance 80% of your home’s purchase price with a first mortgage, 10% of your down payment with a second mortgage and pay the other 10% out of pocket.
- Saving up and putting at least 20% down at closing, which can come from your own money and, in many cases, down payment gifts from loved ones.
FAQs about PMI
What is private mortgage insurance?
Private mortgage insurance protects a mortgage lender when a borrower defaults on their mortgage payments. However, lenders don’t pay for PMI — borrowers do. PMI differs from homeowners insurance, which protects a home’s structure and contents from damage and some natural disasters.
Do all mortgages include PMI?
No. The only mortgages that require PMI are conventional loans where the borrower is making less than a 20% down payment. Conventional loans are those that aren’t backed by the federal government.
What’s the difference between PMI and MIP?
Private mortgage insurance applies to conventional mortgages while mortgage insurance premiums (MIP for short) applies to loans insured by the Federal Housing Administration (FHA).
FHA borrowers are required to pay for MIP, and there are two types: upfront MIP, which is paid at closing, and annual MIP, which is paid each year in 12 monthly installments that are added to their mortgage payments.
In most cases, MIP must be paid for the life of an FHA loan, while PMI can eventually be cancelled.
How do you calculate PMI?
The PMI fee you’ll pay depends on your credit score, debt-to-income ratio and down payment amount, among other factors. However, you can be charged a range of $30 to $70 per month for every $100,000 you’ve borrowed to buy your home, according to Freddie Mac.
How do you get rid of PMI?
You can remove PMI from your mortgage by building at least 20% equity in your home, which translates into an 80% LTV. Once you do that, you can contact your lender to request PMI removal. If you forget to submit a request, your lender will automatically remove PMI from your loan once your LTV ratio falls to 78%.
On the other hand, FHA mortgage insurance can only be cancelled in one of two ways: either by putting 10% down at closing, or refinancing into a conventional loan after you’ve built 20% equity. If you make at least a 10% down payment, MIP is cancelled after 11 years.