What is PMI? 

What is PMI?

Private Mortgage Insurance, or PMI, is an insurance policy that lenders obtain to insure against losses in the event of a foreclosure.

There are different types of PMI, therefore leading to the questions: what is PMI, who pays it and does everybody have it?

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PMI: Private Mortgage Insurance 

PMI (Private Mortgage Insurance) is a private insurance policy that lender’s require borrowers to pay for on Conventional Mortgages anytime the loan starts with less than 20% equity (or great than 80% Loan-to-Value).

PMI is quoted by the lender but the policy itself is offered and supplied by Private Mortgage Insurance companies, in which the lender coordinates the policies with during the loan origination process. There are many in the industry such as Genworth, Essent, MGIC, etc.

The PMI is added to your monthly mortgage payment and paid until such time you meet the requirements to have it removed. If you’re looking to get an estimate on what PMI runs, or how much your total payments would be with PMI, use our helpful online Mortgage Payment Calculator.

 

How Much Does PMI Cost?

Unlike the FHA Mortgage and Rural Housing Loans, which base their mortgage insurance on the loan amount, PMI on Conventional loans is determined by your starting loan-to-value AND your credit score.

Because of the way PMI is calculated, it can vary drastically depending on the scenario. In some instances, with great credit and larger down payments, the premium can be as little as $40-$50/month. With lower down payments and credit scores, it can be as high as $200-$300/month.

Loan-to-Value: Borrowers putting 3-5% down – check out our First Time Home Buyer Loan Options if you’re interested in the 3% down Conventional loans – will pay higher PMI premiums than borrowers putting 10 or 15% down. Generally, there is a discount on the PMI premium at 95, 90 and 85% Loan-to-Value.

Credit Scores: Borrowers with lower FICO scores also pay higher premiums than borrowers with excellent credit. This is often the reason that borrowers with lower down payments and credit scores in the 600’s may be more ideally suited for FHA loans. To get a better overview of your mortgage options, read our Home Loans guide where we walk through each option for each situation.

Below is a table that shows the required PMI Coverage (which determines the insurance premium) for various Loan-to-Values:

 

Private Mortgage Insurance (PMI) Requirements
Base LTV Standard PMI Coverage HomeReady PMI Coverage
> 20 Year Term < 20 Year Term > 20 Year Term < 20 Year Term
97% to 95.01% 35% 35% 25% 25%
95% to 90.01% 30% 25% 25% 25%
90% to 85.01% 25% 12% 25% 12%
85% or lower 12% 6% 12% 6%

 

 

Can You Avoid PMI With Less Than 20% Down?

Yes and no.

PMI offers a few options on how the insurance policy can be paid. It can be paid either

  1. Monthly – this is the most common form and an amount is simply added to your overall monthly mortgage payment.
  2. Upfront – this is less common, but there is an upfront single premium policy you can buy. In instances where a borrower can put 10-15% down and has great credit, single premium policies can make sense financially. Once you’ve paid the policy upfront, there are no monthly premiums added to your payment.
  3. Split Premium – this is a combination of paying an upfront premium AND having a reduced monthly premium added to your payment.

As a consumer, it’s important to understand that all Conventional loans (secured by Fannie Mae or Freddie Mac) require PMI if you have less than 20% equity in the home at the time of starting your loan.

However, many lenders (particularly Credit Unions or lenders advertising online) will promote various ‘No PMI’ loans as a way of peaking your interest.

Reality is, in these instances the lender is simply increasing (or “bumping”) the interest rate higher compared to what they could offer on a loan that carried PMI. By increasing the interest rate, the lender generates more profit in the loan and then therefore will pay for an Upfront/Single Premium PMI policy on your behalf. In some instances, this may make sense but in a lot of cases it doesn’t.

For Example: Let’s assume a lender offers 4.500% on a 30-year mortgage with a $100/month PMI payment, and offered 5.000% with no PMI. The increase of .500% in the interest rate would only increase your payment by $61/month (on a $200,000 mortgage), therefore saving you $39/month on your overall payment.

 

When Can PMI Be Cancelled?

Automatic PMI Cancellation

PMI is required to be cancelled once you reach 78% Loan-to-Value based on the original appraised value of the home AND according to the original amortization schedule that was set when you first started your loan. So, paying your mortgage down faster, you’ll still have to have PMI until the point that your initial amortization schedule said you’d get to 78% LTV.

Assuming a 30-year fixed mortgage, if you put 5% down, you generally will be required to carry PMI or a little over 9 Years. With 10% down, it’ll be just over 7 years, and with 15% down it’ll be right at 4.5 years.

 

Borrower-Initiated PMI Cancellation

Assuming the property has appreciated in value or you’ve made improvements to the property, the borrower may be allowed to initiate a request for early cancellation. Ultimately, the mortgage servicing company determines if they will allow this option (however, most do allow it).

For this option, the lender will require a new appraisal to be done on the property to confirm the current value of the home. Once the new value is determined, the lender will look at your existing balance to see if you meet the LTV requirements.

If you’ve carried PMI for 2-5 years, then the LTV will often have to be at 75% for the lender to honor the early cancellation. If you’ve carried PMI for 5+ years, then the LTV simply needs to be at 80%.

Please note: other requirements may apply, and you must check with your servicer to confirm. Generally, you must have made all your mortgage payments on-time in the last 12-24 months to be eligible.

 

What is PMI Summary

PMI is required on every Conventional loan secured by Fannie or Freddie and sold on the secondary market (which is most Conventional loans) that start with less than 20% equity. It can be paid monthly, upfront via single premium, or split between a partial single premium and monthly premiums.

PMI can be very costly though and will often stay on your loan for a very long period, particularly if property values aren’t appreciating quickly.

Many borrowers shy away from FHA loans because FHA Mortgage Insurance stays on for the life of the loan, however, as we reviewed above it’s very possible that you’re going to have PMI for as long as you live in the home assuming you’re only putting 5-10% down.

So be sure to always have your loan officer compare interest rates and PMI costs between FHA and Conventional Loans. For borrowers with lower credit scores and lower down payments, the savings on an FHA loan likely will be very significant.

 

Compare Loan Options with or without PMI