What Is PMI on a Mortgage?

Types of PMI

There are different kinds of PMI. Like other insurance products, there are multiple ways to pay. Here are the types of PMI available for conventional loans:

Borrower-paid

• Borrower-paid is the most common type of PMI.
• It works similar to other insurance policies you may have.
• As the borrower, you’ll see PMI charges, sometimes called premiums, on your monthly mortgage statement.
• The monthly payments for PMI may eventually be canceled when you have enough equity in your home.

Lender-paid

• With lender-paid, the lenders pays for your mortgage insurance.
• It can come at the cost of a higher interest rate on your loan.
• Because the insurance is paid for in the form of a higher interest rate, the insurance can’t be canceled as it is a part of your mortgage

Single-premium

• Instead of making monthly payments, you pay the insurance premium in one lump sum at the closing of your mortgage.
• You can pay in cash or have it financed and included into your home loan.
• Like lender-paid PMI, the insurance can’t be canceled and is non-refundable — it’s priced into your mortgage payment.

Split-premium

• Split-premium PMI works as a combination of the other types of PMI
• Part of the insurance premium is paid up front, while the rest is rolled into monthly payments.
• The upfront portion can’t be canceled, but the monthly premiums can be when you have enough equity in the home

Each type of PMI comes with benefits and drawbacks. There are also different ways to pay for or finance each type. Ask your lender or mortgage officer about which type works best for your home purchase and financial situation.

How much can mortgage insurance cost?

The cost of PMI can vary and is calculated as a percentage of the total home loan amount. You may see ranges of 0.4% up to 2%, but it can go beyond that range depending on lender requirements and your credit history and financial standing.

Generally, the more you put down when purchasing the home, the less your monthly PMI payment will be. Your credit score and credit history can play a part in your PMI payments as well. A good credit score and healthy credit history can show you’re a responsible borrower, which can help lower your PMI payments. Lenders may use different scoring models. You can check with your lender if you have questions about which scoring model is used.

How to avoid PMI

There are some ways you may be able to avoid PMI:

1. Make a 20% or more down payment

If you’re able, putting down at least 20% of the purchase price can help you avoid PMI. If avoiding PMI is important to you, consider waiting until you’ve built enough savings that you’re able to put down a higher down payment. However, remember that home prices and interest rates can change over time, which can impact home affordability.

2. Consider government loan programs

If you’re eligible, certain government loan programs do not require PMI. Loans like VA loans and USDA loans do not typically require PMI — there is more information about insurance for these loans below. Depending on the loan type, there may be other fees associated with the home loan.

3. Consider a less expensive home

If you don’t have time to save money but still want to avoid PMI, adjusting your budget can help you meet the 20% threshold. Your mortgage broker may have approved you for a loan up to a certain amount, but you do not need to use all of it. Of course, there are personal tradeoffs when you adjust your budget. Because your home is typically the biggest purchase you’ll ever make, a less expensive home can save you quite a bit of money over the life of the loan.

There is no universal right choice, and simply trying to avoid PMI altogether may not be the best financial or personal decision for all home buyers. The decision depends on your financial standing, budget and goals.

When does PMI go away automatically?

Depending on the type of PMI, you don’t have to make PMI payments for the entire length of your loan. If you’re making monthly PMI payments, there are multiple options to have these premiums canceled. One is to simply wait. When the principal balance in your home is scheduled to reach 78% of the home’s original value according to your loan’s ammortization schedule, your lender will automatically cancel your PMI as long as you are current on your payments. 

Your lender should provide you with an amortization schedule with your original loan documents. This schedule shows each of your monthly payments and how much goes to your principal balance, how much is charged in interest and the remaining principal balance.

How to get rid of PMI yourself

You have a right to request your lender cancel PMI when your principal balance is at 80% of the home's original value. If you have borrower-paid PMI, here are some ways to get rid of PMI:

1. Make extra payments

• Apply extra payments directly to the principal balance of your loan.
• Doing so can reduce your balance faster than scheduled and help you reach the 80% threshold sooner.
• When making extra payments, be sure you apply them to the principal only and are not making an early, regular payment.

2. Monitor your home’s appreciation

• The equity in your home may have improved if your home rose in value after closing.
• Your lender may require an appraisal to verify the new value in your home.
• If you notice the market is rising, there are a number of online tools you can use to give you a free estimate of your home’s value.

3. Consider refinancing your mortgage

• When you refinance your mortgage, you’re essentially creating a brand-new loan.
• If the value of your home has gone up, you have at least 20% in equity in your home and interest rates are more favorable than when you purchased your home, a refinance can eliminate PMI.
• You should ensure the savings of the refinance outweighs the costs that come with refinancing.

Requests from you to cancel PMI must typically come in writing and your lender may request you get a home appraisal. The Consumer Financial Protection Bureau (CFPB) has more information on PMI cancellation requirements.

The CFPB also states that regardless of your home’s value, your lender must stop PMI at the halfway point of your loan’s schedule. For a 30-year loan, this would mean after 15 years of payments have passed. This rule applys to all home owners.  This type of PMI cancellation is more likely to occur for homeowners making interest-only payments or who are in a forbearance plan since they may not yet have the required equity in their home. Note that for PMI to be removed, you need to be current on your payments.

Government home loan assistance

Government loan programs are worth exploring if you’re eligible. Government loan programs typically don’t require PMI, but may have additional fees, either added to the mortgage upfront or paid monthly, similar to PMI.

The Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) and U.S. Department of Veterans Affairs (VA), all have home-buying assistance programs. Contact the relevant government agency if you have any questions about loan requirements and eligibility.

Do FHA loans require mortgage insurance?

Federal Housing Administration (FHA) loans are mortgages that are insured by the FHA. With FHA-insured loans, you can make a down payment as low as 3.5%. FHA loans do require insurance that is similar to PMI.

FHA insurance includes both an upfront premium and monthly payments. The amount you have to pay can vary depending on how much money you put down.

Unlike typical PMI, FHA insurance doesn’t cancel when you reach a certain amount of equity in your home. Instead, for FHA loans, if you made a down payment of 10% or more, you’ll make insurance payments for 11 years. If you made a down payment of less than 10%, you’ll make insurance payments for the life of the loan. You can talk to a housing counselor provided by the U.S. Department of Housing and Urban Development if you have questions about FHA loans.

Do USDA loans require mortgage insurance?

For eligible home buyers in some rural locations, home loan assistance may be available through the USDA loan program. These are attractive loans for home buyers in rural areas because they don’t require a down payment. Mortgage assistance is provided through the USDA, but you’ll apply for a loan with a private lender. Technically, there is no PMI for USDA loans, but you will be charged an annual guarantee fee which is added to the monthly mortgage payment.

Do VA loans require mortgage insurance?

The VA provides a guarantee to a portion of a home loan for eligible veterans. This is a guarantee that the VA will reimburse the lender if you’re unable to make your payments and face foreclosure of your home. There is no PMI with VA loans, but there is an upfront fee that may be added to the overall cost of the home purchase. This fee is called the VA funding fee and not every borrower is required to pay it. You can talk to a VA loan technician if you have any questions regarding a VA loan.

There are multiple VA home programs for eligible service members. VA loans don’t require a down payment, unless one is required by your lender. You can read more about VA loan requirements and eligibility in the VA Home Loan Guaranty Buyer’s Guide.

The value of PMI for homeowners

While PMI protects the lender and is an added expense to home buyers, if you’re unable to come up with a 20% downpayment, PMI can be a way to secure the home you’re after. Getting into your home sooner can allow you to build equity and take advantage of an opportunity if the timing is right for you and your family.

But no matter the market conditions, there are still best practices you can follow to prepare your credit to buy a home. The earlier you start preparing yourself, the more confident you’ll feel going into the home-buying process.