One part of many people's mortgages is something called Private Mortgage Insurance (PMI). It can raise your mortgage payment if it is part of your mortgage. But you might be paying more than you need to when you make your monthly mortgage payment if you have private mortgage insurance (PMI).
You can work to eliminate PMI. Start with our guide to learn how to get rid of a PMI payment.
What is PMI?
PMI is insurance that protects the lender if a borrower defaults on a mortgage. A default is when a borrower stops paying on a home loan. If the borrower can’t get caught up on payments, the lender can foreclose on the home and sell it. Often the lender can’t sell the home for enough to cover the mortgage balance. PMI helps to make up the difference to the lender. Many times, first-time home buyers are asked to pay PMI.
Borrowers typically have to pay for PMI if they made a down payment of less than 20% on a conventional mortgage. Borrowers pay for PMI, but it only benefits the lender, so it’s best to remove PMI as soon as possible.
You may also have lender-paid PMI (LPMI), which means that your lender pays for your PMI. While this might sound like a great deal, it’s not. Lenders typically charge a higher interest rate in exchange for paying for your PMI. In other words, you’re still paying for it.
FHA Mortgage Insurance Premiums
The Federal Housing Administration insures FHA loans. These mortgages don’t have PMI, but they have something similar — mortgage insurance premiums (MIP). You pay both an upfront premium, which you can roll into your mortgage and an ongoing MIP. MIP lasts for 11 years or for the life of the mortgage, depending on the amount of your down payment and the size and term of your mortgage.
If you’re paying for PMI, you can ask for it to be removed when your mortgage balance is 80% or less of the original value of your home. You can make extra payments to pay down your balance sooner — just make sure to let your lender know you want the extra payments to go toward your principal. Otherwise, your extra payment could be credited toward your next payment.
Another way to think about it is that you can ask your lender to remove your PMI when you have 20% equity in your home. Your home equity is the difference between your home’s value and the amount you owe on your mortgage.
You can increase your equity by making payments or by your home increasing in value. If you reach 20% equity due to your home value increasing, your lender may not remove your PMI until your mortgage balance reaches 80%. This is because PMI removal is based on the original value of your home, which can either be the appraised value of your home when you purchased it or the sales price — whichever is lower. Some lenders may be flexible, though, so it doesn’t hurt to ask.
Let’s say when you bought your home, it was appraised at $150,000. You made a 10% down payment of $15,000, so your loan balance is $135,000. You can request that PMI be removed when your mortgage balance reaches $120,000. Even if your home value jumps and gives you more than 20% equity, you may still have to wait until your mortgage balance is 80% or less of the original value.
To have your lender remove your PMI, you must make the request in writing. You also need to be up-to-date on your payments and have a good payment history. Your lender may request an appraisal to confirm your property hasn’t decreased in value.
If you don’t ask to have PMI removed, your lender is required to remove it when your mortgage reaches 78% of the original value of the home.
Refinancing for PMI
Refinancing is when you replace your current mortgage with a new loan. It can also be a tool for getting rid of PMI. It works in a few ways:
- Refinancing a mortgage with lender-paid PMI. If you have lender-paid PMI, the only way to remove it is to refinance. Ensure you have at least 20% equity in your home so your new mortgage doesn’t require PMI.
- Refinancing an FHA mortgage. If you have an FHA loan, in most cases you’ll need to refinance to a different type of mortgage to remove your mortgage insurance. For example, if you have at least 20% equity in your home, you could see if you can refinance into a conventional mortgage.
- Refinancing a mortgage with borrower-paid PMI. If your home value has significantly increased, you may be able to refinance and remove PMI. When you refinance, your loan values are based on your home’s current value, not its original value. If you have at least 20% equity based on your home’s present value, refinancing might be worthwhile.
Is it worth refinancing to get rid of PMI? That depends on a few factors.
- The interest rate. You may not want to refinance if interest rates have jumped since you took out your original mortgage.
- Closing costs. When you refinance, you’re responsible for closing costs. Those costs are 2% or more of your loan amount, which adds up to thousands of dollars.
- Your financial situation. You have to qualify for a refinance, which is similar to the process you went through to get a mortgage. Lenders will look at your credit score, which is a 3-digit number that sums up your credit score.
You’ll typically need a 620 or higher to refinance. You’ll also need a debt-to-income (DTI) ratio of 50% or less. To find your DTI ratio, lenders compare your monthly income to your debt payments.
Your debt payments include your new mortgage payment, auto loans, credit card minimums, student loans and any other loans. If you have a pre-tax monthly income of $5,000 and monthly debt payments of $2,000, you’d have a DTI ratio of 40%. These factors, along with your income, determine whether you’ll be approved to refinance and the interest rate you’ll be offered.
Best Mortgage Lenders for Refinancing
Looking for the best mortgage lender for refinancing? Here are Benzinga’s recommendations.
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How much does PMI actually cost? PMI typically costs 0.5% to 1% of your loan amount each year. It could cost more depending on your credit score, loan amount, down payment amount, loan term and loan-to-value (LTV) ratio. Your LTV ratio is the amount of your loan when compared to the value of your home. If you took out a $200,000 home loan to buy a $225,000 home, you have an 89% LTV ratio ($200,000 is 89% of $225,000).
With that $200,000 home loan, if your PMI costs 0.5% of your loan amount each year, you’d pay $1,000 per year. That comes to $83 per month. If it’s 1% of your loan amount each year, that’s $2,000 per year or $166 per month.
Should You Worry About PMI?
While it’s frustrating to pay for something that doesn’t benefit you as a borrower, PMI may be unavoidable. If you’re a first-time home buyer, your mortgage options may be limited, especially if you don’t have a lot saved up for a down payment. PMI encourages lenders to offer loans to borrowers with lower down payments.
If you want to avoid PMI without making a 20% down payment, you have a few options. USDA loans, which are backed by the Department of Agriculture, and VA loans, which are insured by the Department of Veterans, don’t require a downpayment and don’t have PMI. Lenders may also offer special loans that don’t have PMI. These are often for first-time home buyers and they may have income limits.
If you already have a loan with PMI, you’ll need to decide whether to wait and cancel your PMI when you reach a balance of 80% or less or see if you can refinance to remove it.
To decide whether to refinance, contact at least 2 or 3 lenders to find out your options. Review each loan option, looking at fees, discounts and closing costs. Look at your monthly payments after the refinance and compare them to what you’re paying now. Ultimately, your refinance should put you in a better financial position than where you are now.
If you decide to move forward with a refinance, choose a lender offering competitive rates and excellent service. Be responsive to any lender requests and schedule your appraisal quickly if required. Once your loan is approved, your lender will work with you to set a time to sign your closing documents and you’ll start your new, PMI-free loan.
When can I stop paying PMI?
You can stop paying PMI once the balance on your mortgage reaches 80% loan to value. This number is based on the orginal value of your home such as the purchase price.
How do I avoid paying PMI?
You can avoid paying PMI by putting down at least 20% on your home. This will also reduce you principle balance and help keep your mortgage payments lower.
Do you get PMI back when you sell your house?
No, the lender does not refund the paid PMI to you when you sell your home.
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