Private Mortgage Insurance & How it Works
What is PMI?
Private Mortgage Insurance, or PMI, is required by most lenders if the borrower is unable to put down less than 20% of the appraised home value or sale price. This insurance provides some protection for the lender in cases where the borrower may default on the home loan. The borrower is paying the premiums on the insurance policy, and the lender is the beneficiary.
Are "PMI" and "MIP" the same thing?
While similar, there are differences between private mortgage insurance and FHA’s mortgage insurance premium or MIP. MIP is a government-administered mortgage insurance program that does have certain restrictions. The FHA has maximum regional loan limits that are lower than those with private mortgage insurance. So, it may be more expensive. Plus, FHA insurance lasts for the life of the loan, unlike private mortgage insurance which can be removed in most circumstances.
How to avoid PMI
You can avoid mortgage insurance altogether by coming up with a 20% down payment. Though it's certainly a significant amount of funds, you could end up saving thousands of dollars by forgoing PMI. Be sure to look into gift money for your down payment if you don't see yourself reaching the 20% mark alone.
Who pays for mortgage insurance?
The lender makes the payment to the mortgage insurance company, although they will generally pass that cost on to the borrower. Typically, a portion of the mortgage insurance premium is paid upfront at closing, and the rest is paid as part of the monthly mortgage payment.
How is mortgage insurance paid?
Private mortgage insurance can be paid on either an annual, monthly, or single premium plan. Premiums will vary according to loan-to-value (LTV) ratio, type of loan, and amount of coverage required by the lender.
Learn about what goes into a mortgage payment
Can I cancel my mortgage insurance at some point?
Mortgage insurance is maintained at the option of the current owner of the mortgage. In many cases, the lender will allow the cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. However, lenders may take more than your home value into account to consider eliminating PMI. If you've had late payments in recent months, it may disqualify you from removing PMI earlier than is required by law. Lender’s requirements for this can vary state to state so contact your loan servicer directly to find available options.
When I can get rid of mortgage insurance?
If your loan balance has reached the 80/20 LTV mark, contact your mortgage servicer and ask them to remove the mortgage insurance. Under the Homeowners Protection Act, (or PMI Cancellation Act) mortgage lenders are required to get rid of PMI when the balance on your loan drops to 78%. (Note: the lender may require an appraisal to verify your home's loan-to-value.)
You may be able to speed up this process by sending a PMI cancellation letter to your lender. In addition to possibly setting up an appraisal, they'll have to verify your home value as well.
What should a PMI cancellation letter include?
There's no need to spend countless hours on this document. Simply let your mortgage servicer know that your LTV has dipped below 80%. Then ask what additional steps should be taken to drop your PMI.
How do you calculate if PMI can be removed?
Removing PMI the "traditional" way just involves some simple math. Homeowners can take the purchase price of their residence and multiply it by 80%. The result is essentially the magic number when it comes to removing your PMI.
For example, perhaps you bought your home for $300,000. Once your loan balance drops to $240,000 (80% of the original value), you're free to do away with PMI, for good.
Can PMI be removed if home value increases?
Yes! Property values continue to rise, which means you could get to the 80/20 LTV mark much sooner. Certain home improvement projects can also help you ditch PMI ahead of schedule.
Is it worth refinancing to get rid of PMI?
It ultimately depends on your break-even point with closing costs. If you plan to remain in your current home for the foreseeable future, getting rid of PMI can lead to significant savings in the long run. That said, such a move may not be in your best interest if you're considering a move in the next few years.
Is PMI tax-deductible?
Yes, thanks to the Further Consolidated Appropriations Act of 2020. Be mindful, however, that you can only deduct PMI if you itemize deductions. Most financial experts advise getting rid of PMI rather than deducting it.
If mortgage insurance is canceled, will I receive a refund for pre-paid premiums?
There's a lot of information out there when it comes to refundable mortgage insurance.
If the mortgage insurance was financed at the time of origination and is canceled prior to its maturity you may be entitled to a refund if the refundable option was chosen at the time of origination. However, if there was no refund/limited option, this would negate any option for a refund. When PMI is canceled, the lender has 45 days to refund applicable premiums.
That said, do you get PMI back when you sell your house? It's a reasonable question considering the new borrower is on the hook for mortgage insurance moving forward. Unfortunately for you, the seller, the premiums you paid won't be refunded.
Can I choose the mortgage insurance company and compare rates?
No. You cannot choose the mortgage insurance company, negotiate premiums, or shop for a provider. However, you can do that with homeowners insurance if you're looking to save more money on your monthly payments.
Learn about homeowners insurance.
Can mortgage insurance be canceled on an FHA loan, after the LTV has reached 80% or less?
Please refer to your lender about when you will be able to cancel your mortgage insurance.
How are mortgage insurance escrows applied to the payment?
Lenders collect monies on escrow and remits to PMI when the premium is due. Typically lenders collect 14 months of premiums at a home loan closing. Twelve months of the premium is paid to PMI as the initial premium. The remaining two months are used to start the escrow account. The borrower then pays a percentage going forward that is applied to the escrow account.
Contact your loan servicer with additional questions regarding escrow PMI and whether or not mortgage insurance comes out of your escrow account. It's also a good idea to familiarize yourself with a mortgage escrow account in general.
As my home equity goes up, will my premium payments go down?
Not usually. These questions will have to be answered by your lender because investor and state requirements have a wide variance. Click here to see active states for American Financing.
Is mortgage insurance required on investment properties?
PMI is available on 1 unit investment properties with only 15% required down payment.
Do lenders use PMI to approve higher risk borrowers (e.g. self-employed)?
It is unlikely that your coverage would have any effect on the lender's ability to offer loans to those self-employed. Generally, mortgage insurance is required due to a low down payment.