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Private Mortgage Insurance (PMI): What It Is and How It Works
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Private mortgage insurance, or PMI for short, is a type of insurance that protects the lender if you stop making monthly payments on a conventional loan. PMI is usually required if you buy a home with a down payment less than 20% of the home’s purchase price.
Knowing how PMI works may help you lower your monthly payment or get rid of it altogether as your home’s value grows.
In this guide:
What is private mortgage insurance?
Private mortgage insurance is an extra insurance policy you pay for, to protect your lender if you’re unable to repay your mortgage. If you haven’t saved at least 20% toward the price of the home you’re buying with a conventional loan, you’ll probably pay PMI as part of your monthly payment.
The “private” in private mortgage insurance refers to the fact that the insurance is offered by privately owned companies, rather than the government. You’ll only pay PMI on conventional loans, which follow guidelines set by Fannie Mae and Freddie Mac.
Is mortgage insurance the same as homeowners insurance?
No, mortgage insurance is completely different, and new homebuyers often get the two types of insurance confused. Private mortgage insurance offers protection to the lender you borrow money from, not you. You can’t shop for PMI — the lender selects the company, and there are strict criteria for how and when you can change or cancel it. If you default on your loan and it goes into foreclosure, PMI covers the lender’s legal costs to repossess and resell your home.
Homeowners insurance, also called “hazard” insurance, pays you to fix damage from unexpected hazards like fires, thieves or vandals. You can shop for homeowners insurance and are free to cancel a policy or switch companies at any time. However, if you have a mortgage, your lender usually requires you to have enough coverage to replace your home if it is completely destroyed.
How much is PMI?
You can expect to pay between $30 and $70 per month for every $100,000 you borrow, although the amount may vary based on any or a combination of the following nine factors:
- Your credit score and credit history. A higher credit score will snag you a lower PMI premium. If you have a foreclosure or bankruptcy within the last seven years, your premium will likely be higher.
- Your loan-to-value ratio. The term “loan-to-value ratio,” or LTV ratio for short, measures how much of your home’s value you’re borrowing. For example, if you make a 5% down payment on a home, your LTV ratio is 95%, because you’re borrowing money for 95% of the home’s price. The higher your LTV ratio, the more PMI you’ll pay.
- Your occupancy. You’ll get the cheapest PMI if you’re buying a home you intend to live in as your primary residence. Expect to pay more PMI for a second home.
- The type of home you’re financing. Single-family home PMI usually costs the least, while multifamily homes, condos, townhomes or manufactured home premiums are higher.
- How many people are borrowing. You’ll get a slight break if you’re borrowing with someone else, versus flying solo.
- Your debt-to-income ratio. Lenders divide your total debt by your pretax income to come up with your debt-to-income (DTI) ratio. If it’s higher than 45%, expect a bump in your PMI rate.
- The term of the loan. If you can afford the payment on a mortgage term of 20 years or less, you’ll get a break on your premium.
- Whether your rate is fixed or adjustable. Adjustable-rate mortgages (ARMs) with interest rates that can change in less than five years will require a higher PMI payment.
- The purpose of the loan. You’ll get the best PMI premiums if you buy or refinance your home without taking extra cash out.
Different types of private mortgage insurance
Monthly BPMI. Monthly borrower-paid mortgage insurance (BPMI) is the most common choice. The premium is based on a percentage of your loan amount and is part of your monthly mortgage payment.
Single premium. This may also be called “upfront PMI” and allows you to prepay the premium in a lump sum to avoid paying it monthly.
Lender paid. If you agree to a bump in your mortgage interest rate, your lender may offer “lender-paid mortgage insurance” (LPMI). The lender pays the PMI insurance premium on your behalf with this option.
Split premium. You can mix and match monthly and single premiums, paying a portion of the PMI upfront and adding the remaining balance to your monthly payment.
How to decide between paying PMI upfront or monthly
The table below gives you a side-by-side comparison of when it makes sense to pay PMI upfront or monthly.
|Paying upfront makes sense if:||Paying monthly makes sense if:|
|You have extra savings to cover the expense||Your credit scores are high but your down payment is low|
|You have enough budgeted for move-in costs||You need to save the cash for repairs or upgrades to the home when you move in|
|Your seller is paying the premium costs||You won’t recoup the out-of-pocket costs before you plan to sell the home|
Steps to lowering your PMI payments
There are steps you can take to lower your PMI insurance costs.
Spruce up your credit before you apply for a mortgage
Be sure to make all credit payments on time and clear out your credit card balances 60 to 90 days before applying for a mortgage. Even a 20-point jump in your score could save you big money on your PMI costs.
Make a bigger down payment
The lower your loan amount, the less your mortgage insurance will cost you. Ask a relative for a gift or look at 401(k) loan options to add to your down payment.
Apply with a co-borrower
PMI insurance is typically cheaper if you add someone else to the loan application. If your co-borrower adds income, you may also lower your DTI ratio, which may further reduce your premium.
Have the seller pay your single-premium insurance
If the seller of the home you’re buying is paying a percentage of your closing costs, consider using the credit to pay the lump sum for single-premium PMI.
Take out an FHA loan if you have lower credit scores
FHA mortgage insurance premiums are the same regardless of your credit score, which could save you money each month if your credit history is rocky. One caveat: You’ll have to pay an upfront FHA mortgage insurance premium (UFMIP) at closing, and an annual mortgage insurance premium (MIP) is billed to you monthly regardless of your down payment amount.
How to remove PMI
There are three ways you can remove private mortgage insurance.
- Refinance your home. If current rates are headed lower while your home’s value is headed higher, a refinance may make sense. If your new LTV ratio is 80% or less, you won’t need PMI on your refinance loan. However, you’ll spend 2% to 6% of your loan amount on closing costs so make sure the break-even point is worth it.
- Ask your lender to cancel your PMI. If home values are spiking in your area, you can contact your loan servicer and ask them to cancel your PMI if it looks like your loan balance is 80% of your home’s value. Your lender may require a new home appraisal, but the cost may be worth it if you can get rid of PMI.
- Wait for it to drop off on its own. The PMI Cancellation Act requires that lenders stop charging you for monthly PMI once your loan balance reaches 78% of your home’s purchase price.
How to avoid PMI
If you don’t have the money to come up with a 20% down payment, there are a few more options worth considering:
Get a piggyback loan. This option entails taking out two mortgages to buy or refinance a home. The first loan covers most of the amount you borrow, and a second mortgage — usually a home equity loan or home equity line of credit (HELOC) — “piggybacks” on to the first to make up the difference. One popular piggyback option is the 80-10-10 loan. You make a 10% down payment, get a second mortgage for another 10% and then take the remaining 80% of your home’s value with a first mortgage, and avoid mortgage insurance.
Get a VA loan. If you’ve served in the military, you may be eligible for a loan backed by the U.S. Department of Veterans Affairs (VA). You can buy a home with no down payment and no mortgage insurance. However, you may have to pay a funding fee unless you’re exempt due to a service-related disability.
FAQs about private mortgage insurance
Is private mortgage insurance expensive?
It can be pricey if you have very low credit scores and limited down payment funds.
How long do you have to pay private mortgage insurance?
You’ll have to pay PMI until your loan is paid down to 80% of the home’s original price, unless you can refinance or request PMI cancellation before then.
How much is PMI on an FHA loan?
Although PMI is not applicable to FHA loans, you’ll pay two types of FHA mortgage insurance — UFMIP and MIP mentioned above. The UFMIP is 1.75% of your loan amount and is added to your loan amount. The MIP is 0.85% of your loan amount — with a 3.5% down payment — charged annually, divided by 12 and added to your monthly payment.
Can I shop for mortgage insurance companies?
No. However, you should compare the PMI costs quoted by different lenders to see if the premiums are competitive while reviewing loan estimates.
Do other loan types require mortgage insurance?
FHA loans require mortgage insurance and mortgages backed by the U.S. Department of Agriculture (USDA) require upfront and annual guarantee fees that work very similar to FHA mortgage insurance.
Is PMI tax-deductible?
The itemized deduction for mortgage insurance premiums was extended in 2021, which means you can deduct the amount of PMI premiums you paid during that year.
What’s the difference between PMI and mortgage protection insurance?
PMI covers your lender if you default, while mortgage protection insurance pays off your mortgage balance if you die. Some mortgage protection policies may offer added monthly payment coverage if you’re disabled or unemployed.