What Is PMI? (And Can You Get Rid of It?)
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Melinda Sineriz, Contributing AuthorClose
Melinda Sineriz Contributing AuthorMelinda Sineriz is a writer living in Bakersfield, California. She writes about real estate and personal finance for brands like Realtor.com and LendingTree.
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Alexandra Lee, Junior Associate EditorClose
Alexandra Lee Junior Associate EditorAlexandra is a junior associate editor of HomeLight.com. Previously, she served as a writer and social media manager at Santa Barbara Life & Style Magazine, in addition to interning at the nonprofit honors society Phi Beta Kappa. Alexandra holds a bachelor's degree in communication and global studies from UC Santa Barbara, and she has three years of experience reporting on topics including international travel, luxury properties, celebrity interviews, fine dining, and more.
Buying a home comes with no shortage of expenses. There’s your monthly mortgage payment, property taxes, HOA fees, and homeowners insurance, not to mention regular maintenance. On top of all that, you may be required to purchase private mortgage insurance, or PMI.
So, what’s the purpose of PMI, exactly? It’s meant to protect your lender if you stop making your mortgage payments. If you go into foreclosure, your home will be sold at auction, and it may not sell for enough to cover the balance of your mortgage. PMI makes up the difference to your lender.
Can You Cancel PMI? Check Your Home Value
Enter a few details about your property and we’ll provide you with a home value estimate in less than two minutes. This won’t replace an appraisal, but it can help you run some preliminary math on your approximate LTV.
Are you required to get PMI? That all depends on a few factors. The good news is that, even if you’re required to have PMI, you can (eventually) get rid of it.
Here’s what you need to know:
What is PMI?
PMI is a type of mortgage insurance that protects the lender if a borrower stops making payments.
PMI is usually required when you obtain a conventional mortgage and make a down payment of less than 20%. (The term “conventional” refers to a loan that’s not part of a government program).
When is PMI required?
PMI is usually required when you obtain a conventional mortgage and make a down payment that’s less than 20% of the home’s purchase price. A conventional mortgage is any mortgage that’s not part of a government program, according to the Consumer Financial Protection Bureau (CFPB). So, FHA and VA loans are not conventional mortgages, as they are insured by government programs.
If you’re shopping for a mortgage, you can find out whether you’re required to have PMI from your prospective lender. They are required to disclose PMI costs on your Loan Estimate and on your Closing Disclosure.
Your lender may require you to make ongoing, monthly PMI payments, an up-front PMI payment at closing, or a combination of the two. Some lenders let you choose which option you prefer.
How much does PMI cost?
PMI costs vary, but they typically range from 0.5% to 1% of the loan amount annually. So, for a $200,000 mortgage, your PMI could be $1,000 to $2,000 per year. That’s in addition to your mortgage payment, homeowner’s insurance, and property taxes.
If you have a low credit score or a high loan-to-value ratio, your costs could be even higher. Your loan-to-value ratio is the amount of your loan when compared to the value of your home. If you make a 5% down payment, your loan-to-value ratio is 95%, and you will likely have a higher PMI payment than someone who makes a 10% down payment.
How can you avoid PMI?
The simplest way to avoid PMI is to make a 20% or higher down payment. That isn’t always realistic, though. Some other options include:
- Shopping around: Some lenders may offer a conventional loan without PMI, even if your down payment is less than 20%. Review these offers carefully, though, as the interest rate may be higher than a mortgage with PMI. You could end up paying even more in total costs just to avoid PMI.
- Consider other types of loans: For example, FHA loans and VA loans don’t have PMI. They do have other fees, though. FHA loans require borrowers to pay upfront and ongoing mortgage insurance. Even with the insurance costs, an FHA loan may be a better deal for borrowers with lower credit scores than a conventional loan with PMI. VA loans do not have PMI or mortgage insurance, but there is a funding fee, which varies depending on the amount of your down payment. And, of course, these loans are only available to U.S. veterans.
When can you get rid of PMI?
If you already have a mortgage with PMI, don’t lose hope. You have the right to cancel your PMI once your mortgage balance is 80% of the original value of your home. The date when you reach the magical 80% number should be included on your PMI disclosure form. If you can’t find it, contact your lender. You can also reach that number sooner if you make additional payments to reduce your loan balance.
A quick (and free) way to check your home value
Get a preliminary home value estimate in as little as two minutes. Our tool uses information from multiple sources to give you a range of value based on current market trends.
How to cancel PMI
To cancel PMI, you must make a request in writing and be current on your mortgage payments. In some cases, your lender may request an appraisal to make sure the value of your home hasn’t dropped.
If you don’t ask for PMI to be removed, your lender should drop it automatically when your loan balance reaches 78% of the original home value.
If you have any questions about PMI, contact your lender. The payments might be annoying, but at least they’re only temporary.
Header Image Source: (rupixen/ Unsplash)
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