What is PMI?

Private mortgage insurance, or PMI, protects mortgage lenders if a homebuyer defaults on their loan. But unlike other types of insurance, the lender doesn’t pay their premiums – borrowers do. While the added cost increases your monthly bill, PMI makes lenders more likely to approve riskier borrowers with smaller down payments.

How does private mortgage insurance work?

Private mortgage insurance is generally required on conventional mortgages when a homebuyer puts down under 20% of the home’s purchase price. PMI insurance protects the lender in case the borrower defaults. If your lender decides you need PMI, it will work with an insurance company to determine how much. You’ll then receive an offer of terms before closing on your loan.

How long do you have to buy PMI?

PMI isn’t permanent for most mortgages. Once you own 20% equity in your home, you can contact your lender to remove your PMI requirement. And by law, loan servicers must terminate PMI when you own 22% equity in your home.  

Mortgage insurance vs homeowners’ insurance

Mortgage insurance protects your lender if you default on your loan. But homeowners’ insurance protects you if your property is damaged or otherwise requires repairs.  

5 types of PMI insurance

Depending on your lender and situation, you may have the option to choose your preferred PMI arrangement.  

Single-premium mortgage insurance

Single-premium, or single-payment, mortgage insurance lets you bundle your insurance premiums into one payment. You can usually pay your one-time premium upfront or roll it into your mortgage.  

Borrower-paid mortgage insurance

Borrower-paid mortgage insurance is the most common type of PMI, which spreads your payments out over years. You usually see borrower-paid insurance tacked on as an “extra” on your monthly mortgage bill. However, your PMI payments do not go toward your loan balance.  

Lender-paid mortgage insurance

With lender-paid mortgage insurance, your lender pays the physical bill. But you’re still the one fronting the cash, as lender-paid insurance usually means paying a higher interest rate on your loan.  

Split-premium mortgage insurance 

Split-premium mortgage insurance blends single-premium and borrower-paid PMI. Essentially, you pay part of your mortgage insurance during closing. Then, you pay the rest in monthly installments.  

Federal home loan mortgage protection

If you buy a government-backed FHA loan, you’ll have to pay a different kind of PMI, known as MIP. In fact, MIP is required with all FHA loans, regardless of your down payment size. Generally, you pay MIP as both an upfront payment and as monthly premiums that last your entire loan term.   

How much is PMI?

PMI insurance rates vary greatly, ranging from 0.25% to 2.5% of your total loan value per year. That comes out to paying $250 to $2,500 per $100,000 that you borrow each year. Your exact costs may depend on the following factors.  

Down payment

From the lender’s perspective, a smaller down payment is riskier for two reasons:

• They’ll lose more money if you default.
• The less you pay upfront, the more you’ll pay each month.
• You’ll be increasing your risk of missing a payment. 

As such, lenders charge higher PMI rates for smaller down payments.  

Credit history

Your credit history shows how responsible you are with debt. 

If you keep your loan balances low and always make your payments on time, you’ll have a stronger credit history. But missing payments or taking out too much debt may show that you can’t handle money wisely. 

Generally, the less responsible you are with debt, the higher PMI you’ll pay.  

Type of loan

Fixed-rate loans can be less risky than adjustable-rate mortgages (ARMs). With fixed-rate loans, neither your interest rate nor your payments will change. But interest rates on ARMs fluctuate with the market, potentially making your payments unstable. As a rule, you can expect to pay lower PMI rates on fixed-rate loans.  

How to avoid private mortgage insurance 

With some careful planning and saving, you can usually avoid PMI. Here’s how.  

Conventional mortgage PMI

Generally, the best way to avoid PMI on conventional mortgages is to put at least 20% down. At that point, you pose less risk to the lender. 

You can also try a piggyback mortgage, also known as a 10/10/80 loan. Essentially, you put 10% down out of your savings and then take out two mortgages: one for 10% of your home’s purchase price, and one for the other 80%. Piggyback loans let you bypass the PMI requirement, but you’ll pay a larger bill every month. 

Federal home loan mortgage protection

Unfortunately, MIP on federally-backed loans tends to stick around for life. The only exception is FHA loans, which may let you remove your PMI eventually.  

How to remove PMI from mortgage

If you already have PMI on your conventional mortgage, you can get rid of it by:

• Selling your home
• Refinancing your loan
• Calling your lender to cancel your PMI when you reach 20% equity
• Waiting for the lender to cancel your PMI when you reach 22% equity

However, when it comes to FHA loans, nothing is that simple. Many borrowers pay mortgage insurance for their entire loan term. However, if you put down 10% or more on your FHA loan, you may be able to remove MIP after 11 years of consistent payments. You can also refinance into a non-FHA loan to remove your PMI. 

A pain in the wallet or a foot in the door?

Paying PMI will increase the total cost of your loan, but if you don’t have a full down payment saved up yet, PMI can help you get into a home faster. Before signing for a loan with PMI attached, be sure to weigh the pros and cons to make sure it’s right for you. 

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