Private mortgage insurance (PMI) is a type of insurance that a borrower is usually required to purchase as a condition of obtaining a mortgage loan when the homebuyer is making a down payment that is less than 20% of the home’s appraised price. Unlike most types of insurance, the policy protects the mortgage company’s investment in the home, not the homebuyer (the borrower).
PMI can be used with either a conventional or FHA financing, however, PMI on FHA loans can only be erased by refinancing or a loan payoff. On conventional loans, borrowers can request that monthly mortgage insurance payments be eliminated once the LTV (loan-to-value: ratio of loan amount to appraised price) falls below 80%. Once the mortgage’s LTV falls to 78%, the lender must automatically cancel PMI providing the mortgage is current. This will occur when your down payment, plus the loan principal you’ve paid off, equals 22% of the home’s appraised price. This cancellation is a requirement of the federal Homeowner’s Protection Act even if your home’s market value has fallen. The requirement is based on the LTV and not only on the home value.
Some mortgage servicers may permit borrowers to cancel PMI sooner based on home value appreciation. Suppose the borrower accumulates 25% equity due to appreciation in years three through five, or 20% equity after year five. In that case, the investor who purchased the loan may allow PMI cancellation after the home’s increased value is proven. That can be done with an appraisal. You also may be able to get rid of PMI early by refinancing OR pre-paying your mortgage principal down so that you have at least 20% equity.
Cost of Private Mortgage Insurance (PMI)
PMI costs can range from 0.5% to 2.5% of your loan balance per year. The greater the risk factors, the higher the rate cost. In other words, the lower the down payment, the lower your credit score and the higher the loan balance, the higher the cost of PMI.
Thus, the cost of your PMI premiums depend on several factors:
- Premium plan chosen
- Fixed or adjustable interest rate.
- Loan term (usually 15 or 30 years)
- LTV
- Credit score
- The mortgage insurance coverage required by the lender or investor (it can range from 6% to 35%)
- Whether the premium is refundable or not
- The type of loan: conventional, FHA, cash out refinance, jumbo.
- Usage of property: owner occupied, second home, investment property
