What Is Private Mortgage Insurance?

Most lenders require a down payment of 20% or more when buying a house. If you put less down, making the loan-to-value (LTV) ratio higher than 80%, your lender may add a fee for private mortgage insurance (PMI). Because the loan is a riskier investment, this insurance policy protects the lender—not the borrower—if you fail to make the payments. PMI is an additional cost to your monthly mortgage, so it’s best to avoid having it applied or work quickly to eliminate it by getting that LTV under 80%.

Which Loans Require PMI?

Conventional loans with a loan-to-value greater than 80% usually require PMI, but it may also be applied if you refinance your home and your equity is less than 20%. If you can’t make a 20% down payment, other loan options are available including government mortgage loans; FHA, VA, or USDA loans often have a lower down payment and lower credit score requirements. These loans require Mortgage Insurance if the LTV is over 80%, a different type of insurance than PMI. Discuss your options with your lender to understand the insurance requirements.

How Much Does PMI Cost?

The PMI rate is determined by your credit score and debt-to-income ratio, which increases as your credit score decreases. Other factors include the mortgage type, loan amount, and down payment amount. Fixed-rate mortgages usually have lower PMI rates than adjustable-rate mortgages, and rates are lower the greater the down payment.PMI can range from 0.3% to 2.25% of the loan. For example, if you purchased a $300,000 home with 10% down on a 5%, 30-year mortgage and 1% PMI, your monthly PMI premium would start at about $225. This amount is recalculated each year and decreases as your mortgage decreases. If you made only the required mortgage and PMI monthly payment, it would take you more than six years and $15,441 to pay off the PMI premium. A handy calculator for estimating PMI scenarios is available from NerdWallet.¹

How Can You Remove PMI?

PMI will automatically terminate once your LTV reaches 78% as long as you’re current on payments. You can avoid paying more by requesting it be removed at 80%. When you close on your mortgage, you should receive a PMI disclosure form that includes the date that it falls to 80%, but you can reach this sooner by making additional payments. To remove PMI, you need to have good payment history, no second mortgage, and the current appraisal value cannot be less than the original value.

You may also be able to avoid PMI by “piggybacking” a smaller, second mortgage to combine with the amount you can put down to meet the 20% requirement. Not all lenders offer second mortgages, and interest rates on second mortgages are higher. Although this might not be the best option, you can ask your lender for their guidelines about such loans.

If your home has increased in value, you may want to consider refinancing to remove PMI. PMI will drop if the new loan balance is less than 80% of the current value. Refinancing is a good idea when interest rates are low, allowing you to reduce your payments while dropping the insurance premium. Contact your mortgage lender to review your specific loan requirements to see if you qualify for refinancing.

Read more about planning for a mortgage in our article, “Is Homeownership Within Your Reach?” Learn more about loans with low down payment requirements at Texell.org.

Whether you’re looking to buy a new home or refinance an existing mortgage with or without PMI, discuss your loan options with Texell’s Home Loan Heroes. Call or text 254.774.5104, email mortgage@Texell.org, or visit TexellHomeLoans.com.

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