Part of many people’s mortgages is something called private mortgage insurance (PMI). It can increase your mortgage payment if it is part of your mortgage. But you could be paying more than you need when you make your monthly mortgage payment if you have private mortgage insurance (PMI).
You can work to eliminate the PMI. Start with our guide on how to get rid of a PMI payment.
What is the PMI?
PMI is insurance that protects the lender if a borrower defaults on a mortgage loan. A default is when a borrower stops repaying a home loan. If the borrower fails to catch up on the payments, the lender can foreclose on the home and sell it. Often the lender cannot sell the home for enough to cover the mortgage balance. PMI helps make up the difference for the lender. Often, first-time home buyers are asked to pay the PMI.
Borrowers generally have to pay PMI if they have 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 a Lender Paid PMI (LPMI), which means your lender pays your PMI. While that may sound like a lot, it’s not. Lenders usually charge a higher interest rate in exchange for paying 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 a PMI, but they do have something similar – Mortgage Insurance Premiums (MIP). You pay both an initial premium, which you can build into your mortgage, and an ongoing MIP. The MIP lasts for 11 years or for the term of the mortgage, depending on the amount of your down payment and the size and term of your mortgage.
Removal of the PMI index
If you pay for the PMI, you can request that it be removed when your mortgage balance reaches 80% or less of the original value of your home. You can make additional payments to pay off your balance sooner. Just be sure to let your lender know that you want the extra payments applied to your principal. Otherwise, your additional payment may be credited to your next payment.
Another way to think about it is that you can ask your lender to withdraw your PMI when you have 20% equity in your home. The equity in your home is the difference between the value of your home and the amount you owe on your mortgage.
You can increase your equity by making payments or by increasing the value of your home. If you reach 20% equity due to an increase in the value of your home, your lender may not withdraw your PMI until your mortgage balance reaches 80%. This is because the removal of the PMI is based on the original value of your home, which can be either the appraised value of your home when you bought it or the selling price, whichever is lower. Some lenders can be flexible, however, it doesn’t hurt to ask.
Let’s say when you bought your house it was appraised at $150,000. You have made a 10% down payment on $15,000, so your loan balance is $135,000. You can request that the PMI be removed when your mortgage balance reaches $120,000. Even if the value of your home increases and gives you more than 20% equity, you may still have to wait until your mortgage balance reaches 80% or less of the original value.
To have your lender withdraw your PMI, you must request it in writing. You should also be up to date on your payments and have a good payment history. Your lender may request an appraisal to confirm that the value of your property has not diminished.
If you do not request the withdrawal of the PMI, your lender is required to withdraw it when your mortgage reaches 78% of the initial value of the house.
Refinancing for PMI
Refinancing involves replacing your current mortgage with a new loan. It can also be a tool to get rid of PMI. It works in several ways:
- Refinance a mortgage with PMI paid by the lender. If you have a PMI paid by the lender, the only way to remove it is to refinance it. Make sure you have at least 20% equity in your home so your new mortgage doesn’t require PMI.
- Refinance an FHA Mortgage. If you have an FHA loan, in most cases you will need to refinance with another type of mortgage to remove your mortgage insurance. For example, if you have at least 20% equity in your home, you might see if you can refinance a conventional mortgage.
- Refinance a mortgage with PMI paid by the borrower. If the value of your home has increased significantly, you may be able to refinance and remove the PMI. When you refinance, the value of your loan is based on the current value of your home, not its original value. If you have at least 20% equity based on the current value of your home, a refinance might help.
Is it worth refinancing to get rid of the PMI? It 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 are responsible for closing costs. These costs represent 2% or more of your loan amount, which amounts to thousands of dollars.
- Your financial situation. You must 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 summarizes your credit score.
You will generally need a 620 or higher to refinance. You will also need a debt to income ratio (DTI) of 50% or less. To find your DTI ratio, lenders compare your monthly income to your debt repayments.
Your debt payments include your new mortgage payment, auto loans, credit card minimums, student loans, and any other loans. If you have monthly pre-tax income of $5,000 and monthly debt payments of $2,000, you would have a DTI ratio of 40%. These factors, along with your income, determine whether you will be allowed to refinance and the interest rate you will be offered.
Best mortgage lenders for refinancing
Looking for the best mortgage lender for a refinance? Here are Benzinga’s recommendations.
How much does the PMI really 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 compared to the value of your home. If you took out a $200,000 home loan to buy a $225,000 house, you have an LTV ratio of 89% ($200,000 equals 89% of $225,000).
With this $200,000 home loan, if your PMI costs 0.5% of your loan amount each year, you will pay $1,000 per year. That works out 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 be worried about the PMI?
While it’s frustrating to pay for something that doesn’t benefit you as a borrower, PMI can be unavoidable. If you’re a first-time homebuyer, your mortgage options may be limited, especially if you don’t have much savings for a down payment. PMI encourages lenders to offer loans to borrowers with lower down payments.
If you want to avoid the 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 Affairs, do not require a down payment and have no PMI. Lenders may also offer special loans without PMI. These are often for first time home buyers and they may have income limits.
If you already have a loan with PMI, you will 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 learn about your options. Review each loan option, looking at fees, discounts and closing costs. Look at your monthly payments after refinancing and compare them to what you’re paying now. Ultimately, your refinance should put you in a better financial position than you are in now.
If you decide to go ahead with a refinance, choose a lender with competitive rates and excellent service. Be responsive to all lender requests and schedule your assessment quickly if necessary. Once your loan is approved, your lender will work with you to schedule a time to sign your closing documents and you will start your new loan without PMI.
questions and answers
When can I stop paying PMI?
You can stop paying PMI once your mortgage balance reaches 80% of the loan value. This number is based on the original value of your home, such as the purchase price.
How to avoid paying the PMI?
You can avoid paying PMI by depositing at least 20% on your home. It will also lower your principal balance and help lower your mortgage payments.
Do you get the PMI back when you sell your house?
No, the lender does not reimburse you for the PMI paid when you sell your home.