What Is Private Mortgage Insurance?

If you’re in the process of purchasing a house or are thinking about buying one, you already know that buying a home comes with seemingly endless fees and add-ons. One of those is private mortgage insurance. 

What is private mortgage insurance, and when do you need it? Learn more about PMI, so you’re prepared to buy a home.

What is private mortgage insurance?

What is PMI? Private mortgage insurance (PMI) is a type of insurance that protects your lender if you default on a conventional mortgage. As a homebuyer, you’re responsible for PMI payments, but you benefit, too, since PMI lets you buy a home with a low down payment (often 3% to 5%).

When you get a conventional mortgage, you generally have to purchase PMI if your down payment is less than 20%. However, you probably won’t have to pay for PMI over the entire mortgage. There are some ways you might be able to get rid of PMI and save on your monthly mortgage payments.

How much does PMI cost?

PMI is usually between 0.46% and 1.5% of the original mortgage amount each year. Two main factors influence the cost. They are:

• Your Down Payment: Higher down payments mean less costly PMI
• Your Credit Score: Higher credit scores lead to lower rates

The best way to really understand the cost of PMI is to look at an example. If you have a $300,000 conventional mortgage, your PMI would cost about $115 to $375 per month. Most of the time, your payment is added to your monthly mortgage payment.

However, there are other options for paying PMI. If your lender offers an upfront premium option, you may be able to pay the entire insurance premium at once by rolling it into the cost of your mortgage.

How to get rid of PMI

PMI can significantly increase your mortgage payments. But the good news is that you can often get rid of it before paying off your entire mortgage.

Reach 20% equity through payments

Home values often increase with time. That means even if you haven’t paid off 20% of the mortgage principal, you might already have 20% equity in your home.

To do this, you’ll probably have to request a normal appraisal. Appraisal fees are usually about $300 to $500, but if that appraisal leads to your PMI being canceled, it’s a worthwhile investment.

Request cancellation when you hit 80% LTV

Your loan-to-value (LTV) ratio is the principal balance remaining on your loan divided by the original value of your home. Once you’ve made enough payments to reach 80% LTV, you may request that your lender cancel your PMI.

You should make this request in writing. In most cases, the lender will approve it if you have a good payment history. Some lenders won’t approve the request if you have a second mortgage.

Even if the lender denies your request, they are legally obligated to cancel PMI once you reach a 78% LTV ratio. It’s worth it to apply for early cancellation, though. That 2% might not sound like much, but it could save you thousands of dollars in PMI premiums.

Refinance your mortgage

This might be an option if you have a fixed-rate mortgage and rates have decreased since you originally financed your home. If you can refinance to a lower interest rate, you might be able to reach an 80% LTV ratio faster and eliminate PMI sooner.

Do you have to pay PMI on every type of mortgage?

You only have to pay for PMI if you have a conventional mortgage. A conventional mortgage is a loan provided by a bank, a credit union, or another private lender.

If you have a government-backed loan, you don’t have to get PMI. However, the government requires some kind of insurance in case a borrower defaults. That’s why these loans often have their own versions of mortgage insurance:

• Federal Housing Administration (FHA) Loans: Mortgage insurance premium (MIP) of 1.75% up front and 0.8% to 1.05% annually
• U.S. Department of Agriculture (USDA) Loans: 1% guarantee fee up front and 0.35% annual fee
• U.S. Department of Veterans Affairs (VA) Loans: One-time 1.25% to 3.3% funding fee

Sometimes, these alternate kinds of mortgage insurance can end up being more expensive than PMI. For instance, if you have an FHA loan and put less than 10% down, you must pay MIP over the entire length of the mortgage.

If you qualify for multiple types of loans, it might be helpful to use online calculators to find out which one makes the most financial sense.

Boost your credit score before you buy

For most people, a home is the most significant purchase they’ll ever make. And if you have good credit, you could potentially save yourself tens of thousands of dollars on that purchase.

Are you unsure how to build credit? We’re here to help. Kikoff is a credit-builder app designed for people with poor credit, no credit, or limited credit histories. When you sign up, you gain access to a credit line to buy items in our online store. As you pay off those purchases, we report your on-time payments to credit bureaus.

That’s just the beginning. We also offer rent reporting, secured credit cards, dispute tools, and other resources to help you build credit over time.

It’s free to get started, and we don’t check your credit. Create your account with us today!