Private Mortgage Insurance, or PMI, is an insurance that protects conventional lenders. In other words, if you take out a Fannie Mae or Freddie Mac loan, you may pay this insurance. It only applies to borrowers that put less than 20% down on their home, though.
If you qualify for conventional financing with a down payment less than 20%, you’ll pay PMI, which is a percentage of your loan amount. The exact amount you pay depends on your credit score and your loan-to-value ratio.
Typically, the less money you put down, the more insurance you will pay. The same is true with your credit score. The lower your credit score is, the more insurance you will have to pay.
What is Private Mortgage Insurance?
PMI or Private Mortgage Insurance is a policy that covers the lender – not you. So even though you pay the premiums, it’s insurance to protect the lender. Because the lender takes a risk giving you a mortgage with less than a 20% down payment, the insurance is required. This gives the lender a little relief should you default on the loan.
How Much is PMI?
As we stated above, the amount you pay will vary. On average, though, borrowers pay 0.3% to 1.5% of their loan amount annually. The lender will charge you 1/12th of the annual amount with each mortgage payment. This figure gets included in your debt ratio to help lenders determine if you still qualify for the loan.
Can You Cancel PMI?
There are several ways you can get out of paying PMI. At the onset of the loan, though, there is no way around it. If you put less than 20% down on a conventional loan, you must pay the insurance.
Moving forward, though, you may be able to get out of paying the insurance for the long-term using one of the following methods:
- Pay your principal down faster. If you make just the minimum mortgage payments required, you will stick to the standard PMI schedule as it shows on your amortization schedule. If you make extra payments towards the principal, though, you may knock the principal down faster. This means you’ll hit 80% LTV faster, which means quicker elimination of the PMI.
- Keep track of your home’s appreciation. If you notice homes in the area are selling for more than what you thought your home’s value was, consult with a professional. An appraiser will be able to tell you if your home appreciated enough to help you eliminate PMI. If it did, you can pay for a professional appraisal and petition the lender for the elimination of the PMI.
- Make home improvements that increase your home’s value. If you plan to renovate your home, make improvements that will increase your home’s value. If it increases enough and you pay the principal down far enough, you may see 80% LTV sooner rather than later, allowing you to remove PMI.
PMI is Different than FHA MIP
Don’t confuse conventional Private Mortgage Insurance with the FHA’s Mortgage Insurance Premium. The FHA insurance is government-backed and required for the life of the loan on every FHA loan. With the FHA loan, it doesn’t matter how much you put down on the home. The minimum requirement is 3.5% of the home’s purchase price. If you put down more, it doesn’t help your MIP. You pay the same amount as every other FHA borrower, which right now equals 0.85% of your loan amount.
The only way to get out of FHA MIP is to refinance the loan into a conventional loan. If you do this, though, it’s best to wait until you owe less than 80% of the home’s value. This way you won’t be stuck paying PMI too and you can start fresh on your conventional loan.
PMI does offer some benefits, even though it’s another charge on your mortgage payment. Without PMI, you might not be able to get a conventional loan with less than 20% down on a home. This makes the guidelines a little more flexible and conventional loan programs more accommodating.