You probably had to add private mortgage insurance if you bought a home with less than 20% down. PMI can add hundreds of dollars to your monthly payment – but you don’t need to pay for it forever.
We’ll go over the basics of PMI and what it covers, and we’ll also show you how and when you can stop paying it.
What Is PMI?
Your lender requires PMI payments when you buy a home with a mortgage and bring less than 20% for a down payment. But what exactly is PMI and what protection does it afford you?
PMI is a type of insurance that protects your lender in the event that you default on your loan or go into foreclosure. PMI doesn’t protect you as the homeowner, but you still have to pay the monthly insurance expenses for your lender.
PMI is often confused with two other types of mortgage insurance:
- Homeowners insurance: Homeowners insurance protects you against damage to your property. Most lenders require that you have some form of homeowners insurance as a condition of your loan.
- Mortgage life insurance: Mortgage life insurance is a type of optional coverage that pays off your mortgage in the event that you die before you own your home.
It’s important to know the difference between PMI and other types of insurance. As the buyer, the only benefit you get from PMI is the ability to buy a home without waiting until you have the money for a 20% down payment.
There are two different types of PMI for conventional loans: borrower-paid mortgage insurance and lender-paid mortgage insurance.
BPMI is the most straightforward, simple type of PMI. Your lender adds a PMI fee onto your monthly payment with BPMI. You must continue to pay these BPMI fees until you reach 20% equity in your home.
LPMI allows you to avoid adding a fee to your monthly payment. Instead, you accept a slightly higher interest rate than you could get without PMI. It’s important to remember that, unlike BPMI, you cannot cancel LPMI. LPMI sticks around for the life of the loan and you’ll need to continue paying the same interest rate after you reach 20% equity. The only way to get rid of LPMI is to reach 20% equity and then refinance your loan.
Choosing LPMI means you may have the option to pay all or some of your PMI costs at closing. You’ll get a lower interest rate if you make a partial payment toward your PMI. If you pay for the entirety of your LPMI costs at closing, you’ll get an interest rate that’s identical to the one you’d get if you didn’t have to pay for LPMI.
LPMI and BPMI only apply to conventional mortgages. What about FHA loans? An FHA loan is a government-backed mortgage that’s insured by the Federal Housing Administration. You pay a mortgage insurance premium instead of PMI for an FHA loan. MIP is similar to PMI and gives your lender the same protections if you default on your loan. However, you must pay for MIP at closing and each month. You must also pay MIP for the life of your loan if you have less than 10% down.
How much does PMI cost? The amount you’ll pay for PMI depends on a wide range of factors, including:
- Your down payment: Your lender will charge some kind of PMI if your down payment is lower than 20%. The lower your down payment, the higher risk you are to lenders. Decrease your PMI expenses by bringing a larger down payment to closing.
- Your credit score: This number indicates to lenders how responsible you are when you borrow money. Do you always make your payments on time? Your score will be higher. Do you frequently miss payments or max out your credit? Your score will be lower. A lower score indicates that you may be more likely to default on your loan. As a result, you’ll pay more in PMI.
- Your loan type: You’ll pay less for PMI if you have a fixed-rate loan. This is because fixed-rate loans are more predictable for lenders compared to adjustable rate mortgages.
Your property type, debt-to-income ratio and home value may also influence how much you pay for PMI. As a general rule, you can expect to pay 0.5% – 1% of your total loan amount per year in PMI.
What Does PMI Cover?
PMI helps your lender avoid financial loss if you default on your loan. You don’t gain any type of coverage or benefit from PMI as the buyer. But you don’t have to pay for PMI forever – or even for the duration of your mortgage loan.
How Long Do I Have To Carry PMI?
You must pay BPMI until you have 20% equity in your property. Equity refers to the percentage of your principal balance that you’ve paid off. For example, let’s say you borrow $100,000 to buy a home and you pay off $30,000 of principal. This means you have 30% equity in your home.
Keep in mind that payments that only go toward your principal balance count toward your equity. Paying interest doesn’t help you build equity. Contact your lender and request a mortgage statement if you don’t know how much equity you have. Many lenders also make this information available to you online.
You can contact your lender and request that they cancel your BPMI once you’ve built 20% equity in your home. Many lenders will automatically do this once you reach 22% equity.
You may want to make extra payments on your loan if you want to stop paying for PMI as soon as possible. Your money can go directly to reduce your principal balance when you make an extra payment, but you have to tell your lender specifically that’s where you’d like it credited. Many lenders will automatically apply extra money toward next month’s payment instead.
You must pay PMI for the duration of your loan if you have LPMI or MIP. The only way to cancel PMI is to refinance your mortgage loan’s interest rate or loan type.
Steps To Get Rid Of PMI
The specific steps you’ll take to cancel your PMI will vary depending on the type of insurance you have.
Step 1: Build 20% equity. You cannot cancel your PMI until you have at least 20% equity in your property. Continue to make payments on your loan each month. Divert any extra money you have coming in toward your principal to build equity faster. Don’t forget to include a note with your extra payments that tells your lender you want the payment to go toward your principal balance and not your next payment.
Step 2: Contact your lender. As soon as you have 20% equity in your home, let your lender know to cancel your PMI. Follow any necessary steps your lender requires to make this happen.
Step 3: Make sure your PMI is gone. Ask your lender to confirm that you no longer have to pay PMI. Then request a mortgage statement with your current payment information. Make sure that your monthly payment is lower than what you were paying when you had PMI on your loan. Request more information from your lender if you see that your monthly payment stays the same.
LPMI And MIP
You can only remove your payments through a refinance if you have LPMI or MIP.
Step 1: Reach 20% home equity. You must reach 20% equity in your home before you’ll be allowed to refinance. You’ll need to pay for PMI again if you refinance with less than 20% equity.
Step 2: Compare lenders. You don’t need to refinance with your current lender – you may work with a new company if you’d like. Compare lenders in your area and choose one you’d like to use for a refinance. Check their refinancing standards to make sure you qualify before you apply.
Step 3: Apply for a refinance. Fill out an application, submit your financial documentation and respond to any inquiries from the lender as soon as possible. Remember to specify that you want to refinance to a conventional loan.
Step 4: Wait for underwriting and appraisals to clear. Once you apply for your loan, your lender will begin a process called underwriting. During this time, a financial expert takes a look at your documents and makes sure you qualify for a refinance. Your lender will also help you schedule an appraisal. Wait for the appraisal and underwriting processes to be completed.
Step 5: Acknowledge your Closing Disclosure. After underwriting and an appraisal, your lender will send you a document called a Closing Disclosure. This document tells you the terms of your new loan as well as what you must pay in closing costs. Remember to acknowledge it as soon as you receive it. Your lender cannot schedule your closing until you have time to read your disclosure.
Step 6: Attend closing. Here you’ll pay your closing costs and sign on your new loan. From there, you make payments to your new lender.
PMI is a type of insurance that protects your lender if you default on your loan. PMI gives you no protection as the buyer. You must pay for PMI if you pay less than 20% down at closing. There are two types of PMI for conventional loans: borrower-paid mortgage insurance and lender-paid mortgage insurance. BPMI adds a fee onto your monthly payment but it can be cancelled when you reach 20% equity. LPMI slightly increases your interest rate instead of adding a fee. You cannot cancel LPMI. You must pay a mortgage insurance premium for the entire duration of your loan if you have an FHA loan and put less than 10% down.
You can call your lender and request to cancel BPMI when you reach 20% equity. The only way to remove LPMI or MIP is to reach 20% equity then refinance your loan.
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