What Is Private Mortgage Insurance (PMI)
If you’re buying a house, it might be required
Private mortgage insurance is a protection for mortgage lenders and is often required when someone purchases a home with a conventional loan. Like other insurance policies, it comes with an annual premium and, sometimes, an upfront one, too.
Why Do I Need PMI?
Private mortgage insurance protects your lender in case you fall behind on your payments. In the event you default on your conventional loan, the mortgage insurance you’ve paid for will cover all or a portion of your remaining loan balance.
By offering this protection, PMI essentially lowers the risk you present to a lender and may make it easier to qualify for a loan. On some conventional mortgage loans, PMI is required if you make a down payment of less than 20%.
Some lenders will allow you to make a down payment under 20% without PMI. These loans usually come with higher interest rates.
How Much Does PMI Cost?
PMI typically costs between 0.5% and 1% of your loan, on an annual basis. However, the costs can vary: Having a lower credit score, making a smaller down payment, or choosing an adjustable-rate loan can all make you a riskier borrower, so these come with higher PMI costs. The length of your loan will also play a role.
Your mortgage lender will detail your PMI premiums on your initial loan estimate, as well as on your final closing disclosure form. You can expect to pay your premium either upfront, at closing, or monthly as a part of your mortgage payments.
PMI is different from MIP (mortgage insurance premium). PMI is mortgage insurance on conventional loans. MIP is mortgage insurance required on FHA and USDA loans.
Pros and Cons of PMI
There are advantages and disadvantages to PMI. On the upside, PMI may make it easier to qualify for a loan. Because it lowers the risk you present to a lender, they may be more willing to overlook a low credit score or smaller down payment.
PMI also gives you more buying power, as it lowers the down payment you’re required to bring to the table. If you’re short on funds or just want a smaller initial investment, this can be extremely helpful.
The main drawback of PMI is that it increases your monthly payment and sometimes your closing costs, too. PMI payments are also no longer tax deductible (you may be able to write off PMI premiums on a mortgage taken out before 2017, depending on your income and terms of your mortgage).
Another downside is that mortgage insurance exists solely to protect the lender in case you default. It offers no protection for you if you fall behind on payments.
May make it easier to qualify for a mortgage
Allows you to make a smaller down payment
May increase your monthly payment
May increase your closing costs
Provides no protection for the borrower
Premiums are not usually tax-deductible
How to Avoid PMI
If you’re hoping to secure a conventional loan for your home, avoiding PMI typically requires making a down payment of 20% or more. This isn’t true of all lenders, but it’s a good rule of thumb.
If you don’t yet have 20% of the home price saved up, you might consider delaying your home purchase until you can gather the cash or asking for gift money from a parent or family member. There are also crowdfunding platforms you can use to boost your down payment savings, as well as down payment assistance programs if you qualify.
How to Get Rid of PMI
The good thing about PMI is that it’s not permanent. Once you have 20% equity in the home (meaning your loan balance is below 80% of its appraised value), then you can request your PMI be canceled and removed from your payments. The process for this varies by lender, but the request must always come in writing, and often requires a new appraisal of your home. Reach out to your lender as you near the 20% point to get full details on how you can cancel yours.
Once your balance falls to 78% of the home’s value, your lender is required to terminate PMI on your behalf. You must be current on your payments before they can cancel your policy.
The Bottom Line
PMI is designed to protect your lender, but it does have benefits for buyers, too. Just make sure you weigh the long-term costs, as well as the impact on your monthly payments, before moving forward.
Consumer Financial Protection Bureau: What is Private Mortgage Insurance?
Texas Department of Insurance: Private Mortgage Insurance (PMI)
Consumer Financial Protection Bureau: When can I remove private mortgage insurance (PMI) from my loan?