A Guide to Private Mortgage Insurance (PMI)

What is Private Mortgage Insurance (PMI)?

• Definition: PMI is a type of insurance that borrowers must pay if they make a down payment of less than 20% on a home.
• Purpose: Protects lenders in case the borrower defaults, not the borrower.
• Requirement: Required on conventional loans with less than 20% down payment.
• FHA Loans: Also require mortgage insurance but have different guidelines.

The Cost of PMI

• Monthly Cost: Typically $30 to $70 for every $100,000 borrowed, according to Freddie Mac.
• Cost Variability: Depends on credit score and loan-to-value ratio.
• Potential Overcharges: Be wary of mortgage servicers adding PMI when it’s not required.

Paying for PMI

• Payment Options:
  • One-time, up-front premium at closing.
  • Monthly payments included in the mortgage payment.
• Tax Deductions: PMI was once deductible from federal taxes, but no longer.

Canceling PMI Coverage

• Federal Homeowners Protection Act: Provides three ways to eliminate PMI:
  • Borrower-initiated cancellation once LTV reaches 80%.
  • Automatic termination at 78% LTV.
  • Final termination at the midpoint of the loan.

Borrower-Initiated PMI Cancellation

• Requirements:
  • Written request by borrower.
  • Current on mortgage payments.
  • Satisfactory payment history.
  • No junior liens.

Automatic PMI Termination

• Trigger: When LTV reaches 78%.
• Conditions: Same as borrower-initiated.

Final PMI Termination

• Trigger: Automatically ends at loan term midpoint if not already canceled.

Home Value and PMI

• Appraisals: Changes in home value can affect PMI cancellation eligibility.
• Requirements: Lender may require a new appraisal.

Conventional Loans Without PMI

• Alternatives: Some lenders offer loans without PMI but at higher interest rates.
• Cost Analysis: Compare costs of higher interest vs. PMI payments.

Down Payment Requirements

• 20% Down Payment: Eliminates need for PMI.

Piggyback Mortgages and PMI

• Strategy: Use a second, small mortgage to avoid PMI.
• Cost Consideration: Second mortgages often have higher interest rates.

FHA Mortgage Insurance Premium

• Upfront and Annual Premiums: Required on all FHA loans.
• Cancellation: Conditional on down payment size and loan term.

FAQs

• PMI Duration: Generally until 20% equity is built.
• 20% Down Benefit: Avoids PMI, saving on costs.

The Bottom Line

• Current Trends: Most buyers make less than 20% down payments.
• Cost-Benefit Analysis: Consider costs of PMI vs. non-PMI loans with higher interest rates.