When is PMI required?
Private mortgage insurance is required by borrowers who are contracting a new conventional mortgage loan if their down payment is less than 20% of the purchase price. It is also needed if someone is seeking to refinance their home with a loan-to-value (LTV) ratio of greater than 80% of the property market value.
Borrowers have little control over their private mortgage insurance provider. In most cases, the lender arranges PMI directly with their provider of choice.
Private mortgage insurance vs. mortgage insurance premiums
FHA loans do not require Private Mortgage Insurance (PMI). Instead, they require Mortgage Insurance Premiums (MIP), which are paid directly to the Department of Housing and Urban Development (HUD).
Mortgage insurance on FHA loans is paid in two parts:
- Upfront Mortgage Insurance Premium (UFMIP), which is typically financed into the loan amount.
- Annual Mortgage Insurance Premium (MIP), which is paid monthly as part of the borrower’s mortgage payment.
Types of private mortgage insurance
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1
Borrower-paid mortgage insurance
In most cases, your mortgage insurance premiums will be part of your monthly bill, which also includes your principal and interest payments and other costs, such as property taxes and hazard insurance.
If you want to lower your monthly mortgage payments and have enough money on hand, you may also choose to pay your mortgage insurance premium in a single lump sum at closing.
This will lower your monthly bill compared to what you would have to pay with a monthly premium, and you will not need to refinance your mortgage to eliminate PMI once you have enough equity. However, beware that no portion of the single premium is refundable if you choose to refinance or sell the property before you have enough equity in the property to eliminate PMI.
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2
Lender-paid mortgage insurance
On rarer occasions, your mortgage lender will pay your PMI. However, the borrower is not off the hook and will need to repay their mortgage insurance premium in the form of higher mortgage interest rates or a higher mortgage origination fee.
Although it represents a lower cost upfront, you will repay your lender over the life of the loan, and lender-paid PMI is not refundable. Like borrower-paid mortgage insurance, lender-paid mortgage insurance can only be removed from the loan by refinancing the loan or selling the property.
However, one of the main advantages of this type of mortgage insurance is that, in some cases, the monthly payment could still be lower than making monthly PMI payments despite the increased interest rates.
How much does PMI cost?
The cost of mortgage insurance varies based on your loan amount, loan-to-value ratio, and credit score. Typically, the average cost of mortgage insurance ranges between 0.22% and 2.25% of your mortgage.
According to Freddie Mac, most borrowers pay between $30 and $70 per month for MIP for every $100,000 borrowed. Mortgage lenders typically choose the lowest cost private mortgage insurance provider for their borrowers.
3 factors that impact private mortgage insurance
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1
Size of home loan
The more you borrow, the larger your private mortgage insurance premiums will be. This amount varies depending on the purchase price of the property and the size of your down payment — if you pay more in the down payment, you will pay less in PMI.
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2
Credit score
Your credit score signals to the mortgage lender whether you are more or less likely to meet your mortgage obligations. Borrowers with higher credit scores (760 and above) typically have lower PMI rates.
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3
Type of mortgage loan
Fixed-rate mortgages usually have lower private mortgage insurance premiums than adjustable-rate mortgages<5.4.3 adjustable-rate mortgages> since the latter are perceived as riskier for the mortgage provider.
How to avoid paying private mortgage insurance
There are several options to stop paying PMI once your mortgage principal balance is less than 80% of the original appraised value or the current market value of your home, whichever is less, depending on your lender and the type of home loan you have contracted.
Some mortgage lenders automatically drop the MIP once you are scheduled to reach the 78% LTV point. In other cases, you may need to contact your mortgage provider once you have at least 20% equity in the property.
Another way to avoid paying private mortgage insurance is to refinance your mortgage. In most cases, the mortgage lender will request a home valuation<6.2 home value estimator> – either an appraisal or a BPO (“Broker Price Opinion” is a professional opinion of value) – before accepting to cancel your mortgage insurance requirements.
Bye-Bye PMI
CrossCountry Mortgage offers a loan program called Bye-Bye PMI that eliminates the monthly fee for private mortgage insurance. Borrowers can use a conventional mortgage and borrow up to 85% with no PMI.
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Adjustable-Rate vs. Fixed-Rate Mortgage
Conventional Loan Requirements 2024
FHA vs. Conventional Loan
Advantages of Adjustable-Rate Mortgages
