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Everything you need to know about private mortgage insurance
When you purchase a home, you will have a number of fees to pay. One of those could be something called private mortgage insurance. Private mortgage insurance (PMI) is insurance to protect your lender in the case that you default on the loan.
Here is what you need to know about private mortgage insurance:
Who will pay PMI?
Private mortgage insurance can help borrowers become homeowners sooner, especially if they don’t have 20% saved for a down payment or purposefully choose to pay a lower down payment and use that extra money towards home improvement. Borrowers who put down less than 20% on a private, conventional loan must pay private mortgage insurance. Government loans can have mortgage insurance, but it will differ from private mortgage insurance.
The amount you will pay in PMI will vary
The amount you will pay in private mortgage insurance depends on factors like your credit score, the amount of your down payment, and your loan type. Fees vary from 0.3%-1.5% of the original loan per year. The cost of private mortgage insurance premiums will be shown on your closing disclosure, so review it carefully.
There are several ways you can pay for PMI
When it comes to paying for private mortgage insurance, there are five types of private mortgage insurance, and each will determine how you will pay:
- Borrower-paid mortgage insurance: PMI is paid as an additional monthly fee with your monthly mortgage payments.
- Single-premium mortgage insurance: PMI is paid upfront as a lump sum at closing or financed into the mortgage.
- Lender-paid mortgage insurance: Your lender will “pay” for your PMI, but you will pay for it over the life of the loan in the form of higher interest rates.
- Split-premium mortgage insurance: A combination of borrower-paid and single-premium mortgage insurance.
- Federal home loan mortgage protection (MIP): A type of mortgage insurance used for loans underwritten by the FHA.
The most common way to pay for private mortgage insurance is through borrower-paid monthly fees. Discuss with your lender the best type of payment that best meets your needs.
You can cancel PMI under the right conditions
Yes, you can get your private mortgage insurance canceled but only under the right conditions. To start, if your loan-to-value ratio is 78% of the original value, lenders are required by law to cancel PMI—provided you haven’t missed any monthly payments.
You may also be able to get rid of private mortgage insurance when you refinance, and your new mortgage balance is below 80% of the home value. Always do your research first and get your home reappraised before you decide to use this strategy! If your home value has dropped, you could be adding to PMI rather than getting rid of it.
You can request cancellation of private mortgage insurance from your lender by writing to them directly. They will then work with you to determine your eligibility.