What to Know About Private Mortgage Insurance

Private Mortgage Insurance (PMI) can help you buy a home with a lower down payment. Before you choose this option, it’s important to understand what it is, how it will impact your monthly mortgage cost, and how and when you can remove the additional charge.

What is PMI?

PMI is a type of mortgage insurance that’s usually required with a conventional loan when the buyer makes a down payment of less than 20% of the home’s value. PMI protects the lender if the buyer stops making loan payments since it’s riskier for a lender to give a mortgage with less than a 20% down payment from the buyer.

The most important thing to know about PMI is that it’s not forever. Generally, PMI can be removed from your monthly payments in two ways: when you pay your loan balance down below 80% of the purchase price of your home, or once you have achieved 20% equity in your home.

Homeowner tip

PMI is not homeowners insurance, which provides financial protection from damages to your home. It is an additional monthly cost that’s rolled into your mortgage payment and protects only the lender, not you.

Common questions about PMI

PMI is calculated as a percentage of your mortgage loan amount — in 2022 it typically ranged from 0.58% to 1.86% annually.

The cost of PMI depends on several factors:

Down payment amount — the more you put down, the lower your PMI cost.
Your credit score — the higher your score, the lower your PMI cost.
Mortgage amount — larger loans have a higher PMI cost.
Mortgage type — adjustable-rate loans may have a higher PMI cost than fixed-rate loans because fluctuations in interest rates make them riskier.

Usually, PMI is paid as part of your monthly mortgage payment, but some lenders allow a one-time, up-front payment at closing or a combination of up-front and monthly payments. If your lender offers different payment options, ask them to help you determine which might work best for you.

Both types of insurance can help you qualify for loans that you may not be able to otherwise qualify for and the costs can be rolled into your monthly mortgage payment. Both types only protect the lender, not you, if you fall behind on your payments.

But there are also a few major differences between PMI and FHA mortgage insurance.

The ability to cancel — Generally, PMI can be removed from your monthly mortgage payment when you’ve reached 20% equity in your home or have paid your loan balance low enough. FHA mortgage insurance is more complicated and may involve refinancing.
The type of mortgage loan you have — PMI is associated with conventional mortgage loans, while FHA mortgage insurance is associated with FHA loans.
The influence of down payment amount — PMI is only required for homebuyers who make down payments of less than 20% of the home’s value. Typically, all FHA loans require FHA mortgage insurance, regardless of the percentage of down payment.

Homeowner tip

According to Nasdaq.com, this is how to calculate your equity: 1) Find out the current market value for your home by obtaining an appraisal or searching online; 2) See how much you still owe on your mortgage loan; 3) Deduct your remaining balance from the home’s value; and 4) If your equity is 20% or greater, contact your lender or servicer to remove PMI from your monthly payment. It’s important to note, if you recently purchased or refinanced your home, you may need 25% or greater equity.

Pros and cons of PMI

Whether PMI makes sense for you will depend on your individual financial situation. Here are some pros and cons to help you decide.

Pros

You may be able to make as little as a 3% down payment.
You can request cancellation of PMI.
PMI is potentially more affordable for those with high credit scores.
There is no upfront premium.
You can buy a home more quickly.

Cons

PMI increases the cost of your loan over time.
If you have a low credit score, PMI can be expensive.
Putting less than 20% down may cause you to receive a higher interest rate

How to remove PMI

Generally, once you reach 20% equity or when you pay your loan balance down to 80% of the purchase price of your home, you can request that your lender or servicer remove PMI from your monthly mortgage payment.

When you bought your home, your lender provided you with something called an “amortization schedule.” This indicates when your loan balance is due to reach 80% of the property’s original value — in fact, it will provide an exact date. Keep an eye on this date and on your progress toward that milestone because it will be the day you’re eligible to remove PMI from your loan.

When your loan balance reaches 78% of the original value, PMI will be removed automatically — but to avoid paying more than necessary, simply contact your lender when your balance hits 80% to request cancellation. To request cancellation based on the equity in your home’s current value, you’ll need to pay for an appraisal of your property’s value.

Homeowner tip

In some cases, to remove PMI you’ll need to show you haven’t made a payment 30 days or more past due in the last year and no payment 60 days or more past due in the past two years.