Hailey Johnson
Mortgage insurance, also known as private mortgage insurance (PMI), is an insurance policy that lenders may require homebuyers to purchase if their down payment is less than 20% of the home's purchase price. It protects the lender in the event that the borrower defaults on their loan and lowers the lender's financial risk, allowing them to qualify borrowers who might not otherwise meet the requirements for a loan. While it is not required for all mortgages, it can be necessary for certain loan types, such as Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans.
| Characteristics | Values |
|---|---|
| Who does mortgage insurance protect? | The lender, not the borrower |
| When is it required? | When the down payment is less than 20% of the purchase price of the home |
| What types of mortgage insurance are there? | Private mortgage insurance (PMI), borrower-paid mortgage insurance (BPMI), lender-paid mortgage insurance, single-premium mortgage insurance, split-premium mortgage insurance, mortgage life insurance, mortgage disability insurance |
| How much does it cost? | Between $30 to $70 per month for each $100,000 borrowed; $50 per month per $100,000 borrowed according to one source |
| How do you pay? | Monthly, upfront or both; monthly payments are usually included in your total monthly payment to the lender |
| Can you cancel it? | Yes, once you have paid off enough of your mortgage to have 20% or more equity in your home |
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What You'll Learn
Private mortgage insurance (PMI)
PMI is not insurance for the buyer but the lender. It protects the lender in case the buyer defaults on the loan. The insurance pays the lender a portion of the principal if the buyer stops making mortgage payments. However, the buyer is still liable for the loan, and they could lose the home in foreclosure if they fall too far behind.
PMI can be paid monthly, with little or no initial payment required at closing. Sometimes, you pay for PMI with a one-time upfront premium paid at closing. You can request to cancel PMI when your mortgage balance reaches 80 percent of your home's value. Federal law dictates that your mortgage lender must automatically end PMI when your LTV ratio drops to 78 percent or when you are one month past the midpoint of your loan term.
Before buying a home, you can use a PMI calculator to estimate the cost of PMI, which will vary according to the size of the loan.
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When PMI is required
Private mortgage insurance (PMI) is typically required when a borrower makes a down payment of less than 20% of the purchase price of the home. In this scenario, the lender may require the borrower to purchase PMI to protect themselves in case the borrower defaults on the loan. PMI is an extra expense for the borrower and is usually paid as part of their monthly mortgage payment, although some lenders may offer a one-time upfront payment or a combination of upfront and monthly payments.
PMI is also typically required on Federal Housing Administration (FHA) loans and U.S. Department of Agriculture (USDA) loans. FHA mortgage insurance includes an upfront cost paid at closing and a monthly cost included in the monthly payment. Similarly, USDA loans require insurance to be paid at closing and as part of the monthly payment.
It's important to note that PMI is not required for all types of mortgages. For example, a Department of Veterans' Affairs (VA)-backed loan does not require PMI, as the VA guarantee replaces mortgage insurance. Additionally, some lenders may offer conventional loans with smaller down payments that do not require PMI, but these loans usually carry a higher interest rate.
PMI can be removed from monthly payments once the borrower has achieved a certain level of equity in their home or has paid down the loan balance to a specified percentage of the original value. Federal law dictates that PMI must be cancelled when the loan-to-value (LTV) ratio drops to 78% or when the borrower reaches the midpoint of their loan term, whichever comes first.
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PMI costs
Private mortgage insurance (PMI) rates vary depending on factors such as the down payment amount, credit score, debt-to-income ratio, and loan type. Generally, PMI is required when the down payment is less than 20% of the purchase price of the home.
The average cost of PMI for a conventional home loan ranges from 0.46% to 1.50% of the original loan amount per year, but it can be as low as 0.2% or as high as 2%. For example, on a $300,000 mortgage, the PMI could cost between $1,380 and $4,500 per year, or approximately $115 to $375 per month.
Some borrowers may prefer to pay a slightly higher interest rate in exchange for the lender paying the PMI, known as LPMI (Lender Paid Mortgage Insurance). In this case, the borrower is stuck with a higher rate for the life of the loan unless they refinance or pay it off.
It's important to note that PMI rates are typically higher for adjustable-rate mortgages compared to conventional loans due to the added risk. Additionally, borrowers with low credit scores, high debt-to-income ratios, and smaller down payments will generally pay higher PMI rates.
To estimate the cost of PMI before purchasing a home, borrowers can use a PMI calculator, which takes into account factors such as the loan amount, down payment, credit score, and loan type.
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Cancelling PMI
Private mortgage insurance (PMI) is usually required when a borrower makes a down payment of less than 20% of the purchase price of the home. It protects the lender in case you default on the loan.
Wait for automatic cancellation
According to the Homeowners Protection Act of 1998 (HPA), your lender or servicer must automatically cancel PMI when your mortgage balance reaches 78% of the home's purchase price or the month after you reach the midpoint of your loan's term (for example, 15 years on a 30-year loan).
Request early cancellation
You can request that your lender cancels PMI when your mortgage balance reaches 80% of the home's purchase price. To do this, you must submit a written request to your mortgage servicer and be current on your mortgage payments with a good payment history.
Refinance your mortgage
If your home has increased in value, you may be able to refinance your mortgage and avoid paying PMI. This option may be suitable if you also have other high-interest debt, as you may be able to consolidate it into your new home loan, reducing your overall monthly payments.
Pay down your mortgage earlier
You can pay down your mortgage earlier by making extra payments towards the principal. This will help you reach the 20% equity threshold faster, allowing you to cancel PMI sooner.
Reappraise your home
If you've owned your home for at least five years and your loan balance is no more than 80% of the new valuation, you can request PMI cancellation. An appraisal usually costs a few hundred dollars, but it may be worth it to get rid of PMI sooner.
It's important to note that the specific requirements for cancelling PMI may vary depending on your lender and the type of loan you have. Be sure to check with your lender or servicer to understand their specific cancellation guidelines.
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Differences between PMI and homeowners insurance
Private mortgage insurance (PMI) and homeowners insurance are two distinct types of insurance that serve different purposes. Here are the key differences between the two:
Purpose and Coverage:
PMI is designed to protect the lender or bank, not the homeowner. It is a type of insurance that the lender may require to safeguard their interests in case the borrower defaults on their mortgage payments. PMI does not cover property damage, perils that may damage your home, or provide liability coverage for injuries or damages for which you are financially responsible.
On the other hand, homeowners insurance provides financial protection to homeowners. It covers damage to the structure of the home, personal belongings, and liability risks. It helps repair or replace a home after disasters like fires, storms, theft, and vandalism. It also protects you from liability in case of lawsuits.
Requirements and Costs:
PMI is typically required when the down payment on a home is less than 20%. It is an extra fee paid by the borrower to the mortgage lender, usually 0.5% to 1% of the loan amount annually. It can be removed once the homeowner reaches 20% equity in their home, and it must be terminated by law when equity reaches 22%.
Homeowners insurance, on the other hand, is always required by lenders for all borrowers. It is unrelated to the amount of the down payment and is instead tied to the value of the home and property. The price of homeowners insurance varies based on location, home characteristics, and risk factors.
In summary, PMI protects the lender in case of borrower default, while homeowners insurance protects the homeowner and their property from financial losses due to covered perils. PMI is temporary and can be removed once certain equity thresholds are met, while homeowners insurance is typically maintained for as long as the homeowner wants financial protection for their property.
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Frequently asked questions
Mortgage insurance, also known as private mortgage insurance (PMI), is insurance that some lenders require to protect their interests in case you default on your loan. It lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get.
Mortgage insurance is typically required if your down payment is less than 20% of the purchase price of the home. However, there may be exceptions to this rule. You can check with your lender to see if mortgage insurance is required and how much it will cost.
If you have a conventional loan, your lender may arrange for mortgage insurance with a private company. Private mortgage insurance rates vary by down payment amount and credit score but are generally paid monthly, with little or no initial payment required at closing. Under certain circumstances, you may be able to cancel PMI after you make enough payments on your loan.
