- PMI Insurance
What Is Private Mortgage Insurance?
If you put a down payment of less than 20% when you buy a home, your lender will usually require that you pay private mortgage insurance (PMI).
Here’s what PMI is, how it works, and what it means for you.
What Is PMI?
PMI is a type of mortgage insurance that protects your lender if you stop making payments on your loan.
Mortgage insurance is often confused with homeowners insurance. However, they serve different purposes:
- Homeowners insurance protects you in case your property is damaged.
- Mortgage insurance protects the lender from the borrower not paying back the mortgage.
If you put down less than 20% when you bought the home, your lender will likely require you to pay PMI as part of your regular mortgage payment. For example, if you’re buying a home for $200,000, you’ll likely need a down payment of $40,000 to avoid paying PMI.
After you’ve bought the home, you can typically request to stop paying PMI once you’ve reached 20% equity in your home. PMI is often cancelled automatically once you’ve reached 22% equity.
Finally, PMI only applies to conventional loans – other types of loans often include their own types of mortgage insurance. For example, FHA loans require mortgage insurance premiums (MIP), which operate differently than PMI.
What Factors Affect PMI?
Your lender will consider a few factors when determining how much PMI you’ll have to pay as part of your regular mortgage payment. Let’s review some of them.
Down Payment Amount
Your down payment plays a significant role in determining how much PMI you’ll have to pay. Putting 20% down is typically required to avoid paying PMI – anything less means your lender will likely require you to pay PMI.
A smaller down payment can represent higher risk for the lender, meaning the lender stands to lose a larger percentage of your loan if you default and your home goes into foreclosure. A lower down payment also usually means your regular mortgage payments are higher, and that it will take longer before you are able to cancel PMI. All of this increases the possibility that you might miss a payment, meaning the lender may charge higher PMI premiums.
Even if you can’t afford a down payment of 20%, increasing your down payment can reduce the amount of PMI you’ll have to pay.
Your lender will review your credit history to see if you’ve been a responsible borrower in the past.
Your credit score can indicate how reliably you’ve paid back money you’ve borrowed. A higher credit score, for example, can show that:
- you regularly pay more than the minimum payments on your accounts and credit cards.
- you don’t borrow more money than you can pay back.
- you pay your bills on time.
- you avoid maxing out your credit limit.
A solid credit history and high credit score can mean a lender may charge less in PMI premiums because you’ve shown you’re a responsible borrower that pays back what you borrow.
On the other hand, if you have a lower credit score, your lender may have less faith in your ability to manage your debt responsibly. As a result, you may have to pay higher PMI premiums.
Type of Loan
Your loan type can influence how much you’ll have to pay in PMI. For example, fixed rate loans can reduce the amount of risk involved with the loan because the rate won’t change, leading to consistent mortgage payments. Less risk can mean a lower mortgage insurance rate, meaning you might not need to pay as much PMI.
Adjustable rate mortgages, or loans with a rate that can go up or down based on the market, can bring more risk because it is harder to predict what your mortgage payment will be in the future. This means the mortgage insurance rate could be higher with ARMs. However, because ARMs also typically have lower initial interest rates than fixed rate mortgages, you may be able to pay more towards your principal, build equity faster and reduce the amount of PMI you need to pay.
In the end, there are a lot of elements that can influence how much PMI you’ll have to pay. Your lender can walk you through different loan options and how much PMI you should expect to pay.
How Much Is PMI?
PMI, like all types of mortgage insurance, is based on insurance rates that can change daily. PMI typically costs between 0.5% and 1% of your loan amount per year.
Your loan type, down payment and credit score are all unique factors that play into how much you pay for PMI. Other factors, like your debt-to-income ratio (DTI) and your home’s value, can also affect what you pay.
How Long Do You Have To Pay PMI?
You don’t have to pay PMI forever, or even for the duration of your mortgage. The specific amount of time you pay for PMI depends on your loan amount and how much equity you have in the home.
Most mortgage lenders allow you to request to stop paying PMI when you reach 20% equity in your home. Often, lenders will cancel your PMI automatically cancel when you reach 22% equity.
If you want to stop paying PMI as fast as possible, you can pay additional payments to your principal balance and build equity in your home faster. Once you reach 20% equity, call your lender and request that they cancel your PMI.
How To Avoid PMI
How you can avoid PMI depends on what type of PMI you have:
- borrower-paid private mortgage insurance (BPMI), which you’ll pay as part of your mortgage payment
- lender-paid private mortgage insurance (LPMI), which your lender will pay upfront when you close, and you’ll pay back by accepting a higher interest rate.
Let’s review how each type works in more detail, and what steps you can take to avoid paying either one.
BPMI is the most common type of PMI. BPMI adds an insurance premium to your regular mortgage payment. You can avoid BPMI altogether with a down payment of at least 20%, or you can request to remove it when you reach 20% equity in your home. Once you reach 22%, many lenders will remove BPMI automatically.
Another option is for your lender to pay your mortgage insurance premiums as a lump sum when you close the loan. In exchange, you’ll accept a higher interest rate. You may also have the option to pay your entire PMI yourself at closing, which would not require a higher interest rate.
Depending on the mortgage insurance rates at the time, this may be cheaper than BPMI, but keep in mind that it’s impossible to “cancel” LPMI because your payments are made as a lump sum upfront. If you want to lower your mortgage payments, you’d have to refinance to a lower interest rate, instead of removing mortgage insurance.
Your specific PMI rate, how long you’ll have to pay, and whether BPMI or LPMI is better for you depends on your individual loan and your unique financial situation. When you’re shopping for a home, ask your lender how they handle mortgage insurance and how much you could expect to pay in PMI. Rocket Mortgage® by Quicken Loans® is here to help you figure out your best options.
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