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When you take out a mortgage and put down less than 20%, your lender will require that you get private mortgage insurance. You can cancel PMI when you get enough equity in the home.
When you buy a home, you’ll have to fulfill certain requirements ahead of closing. Your mortgage company will require you buy homeowners insurance and title insurance, but you may also need to buy private mortgage insurance, or PMI.
Private mortgage insurance is generally required by mortgage companies if you take out a conventional loan and your down payment is less than 20%. With PMI, your lender is protected if you stop making payments on the loan. Your method of payment for PMI can vary from lender to lender, but your premiums are typically added to your monthly mortgage payment.
You are eligible to cancel PMI once your home equity exceeds 20%. Some lenders may also offer loans that don’t require PMI, but you’ll have to pay a higher interest rate.
Mortgage insurance is also required if you take out a loan with the Federal Housing Administration, which offers loans for people with bad credit and any low-income person who purchases a loan within their maximum loan limits. FHA mortgage insurance is referred to as your “mortgage insurance premiums”, or MIP, but there’s very little to no difference between PMI and MIP. With FHA loans, your insurance premiums are automatically part of your FHA mortgage payment, and the rules for canceling your mortgage insurance are slightly different with FHA loans.
Private mortgage insurance is an insurance policy that most lenders require you to buy when your down payment is less than 20%. You may also need to get PMI when you refinance your mortgage and your loan-to-value (LTV) ratio is greater than 80%. (Your LTV is another way of indicating how much equity you have in your home; if your equity is less than 20%, then your LTV is greater than 80%.)
You don’t shop around for private mortgage insurance like you would with other types of insurance products. Rather, your PMI is determined by your mortgage company.
To pay for private mortgage insurance, your lender will typically give you a few options:
Borrower-paid mortgage insurance – the most common PMI payment plan – is added to your monthly mortgage payment. Your PMI, along with your property taxes and homeowners insurance, is typically paid through an escrow fund set up by your bank.
Your BPMI payments are usually fixed throughout the duration of your mortgage, so if you notice that your mortgage payment increased, it’s probably because your property taxes or homeowners insurance went up. If your home insurance rates increased, you should shop around for lower rates, or you can call and speak with a licensed representative at Policygenius.
When you opt for LPMI, your lender pays for your mortgage insurance with a lump-sum payment up front. With LPMI, you pay a higher interest rate in exchange for not having to pay a hefty monthly premium for PMI.
LPMI may not be the best idea if you end of living in the home a long time on your current mortgage, but be sure to run a few quotes and compare interest rates and BPMI/LPMI premiums.
Say, for example, that you’re quoted $200 BPMI plus 4% interest. Now, compare that to $0 LPMI plus 5% interest. If the $200 BPMI plus 4% payment is greater than the LPMI payment, then you might save money with LPMI.
Be sure to look at your timeline and see how fast you think you can get to 20% equity. Based on how many more months are left on your mortgage, is it better to save on your monthly payment before you hit 20% equity or after?
You may find that LPMI only makes sense if you plan on refinancing once you hit 20% equity or selling the home within five to 10 years. It may not be the best option if your down payment is close to 20%, as you’re almost eligible to cancel mortgage insurance at that point.
Single-payment mortgage insurance gives you the option to pay all of your mortgage insurance in a lump sum at closing and avoid paying monthly premiums.
But the single-payment route may not be practical, as it’s essentially a misallocation of money that should be going toward your down payment. A larger down payment means a lower principal balance, which means paying less interest, more equity, and the ability to cancel your PMI sooner.
With split premiums, you pay a portion of your PMI up front, and you pay a portion as part of your monthly mortgage payments. Split premiums pay be a solid option if you don’t have enough cash up front for a single payment but still want to reduce your debt-to-income ratio.
If your credit score increased or your debt-to-income ratio is more favorable than it was when you first took out the mortgage, you have the option to refinance your mortgage.
If you qualify, refinancing makes it possible for you to lock in lower interest rates, secure shorter loan terms, and switch from an adjustable-rate mortgage to a fixed-rate mortgage. Refinancing may also result in your PMI getting dropped if it’s determined during underwriting that you have 20% equity in the home.
If you don’t have 20% equity, but you have significantly more equity in the home than when you first took out the mortgage, then you’ll still have to pay PMI, but you may see your mortgage insurance rates go down.
Refinancing requires all of the same closing costs of the original loan – as much as 6% of the loan itself – so if you’re thinking of refinancing, be sure that the long-term savings are worth the exorbitant up-front costs.
The cost of PMI is usually anywhere from 0.3% to 1.2% of the principal balance of your loan. Your mortgage insurance rate is based on a number of factors, including:
Calculating your PMI payment is fairly easy. Say your rate is 0.7%, and your remaining loan value is $375,000. You simply multiply 0.007 by 375,000 and divide that number by 12, giving you a monthly mortgage insurance premium of $218.75, or a $2,625 annual payment.
Once you reach a 20% equity in your home, you’re eligible to get PMI removed from your mortgage payments. If your home appreciated so much that you think you beat your amortization schedule to the punch, you’ll have to prove that to your mortgage company by hiring an appraiser to assess your home’s value.
On the day the principal balance of your mortgage reaches 78% of the original value of the home, your bank is required by law to cancel your PMI. Their math is based entirely on how much you’ve paid toward the mortgage and doesn’t take your home’s current value into account.
Once you’ve paid the principal balance of your mortgage down to 80% of the home’s original value, you can request that your lender cancel your PMI. You should be able to find the day you’re supposed to hit 80% on the closing disclosure form you received when you took out the mortgage.
Once you decide to cancel, your lender will require that you meet certain criteria, like having a good payment history and hiring an appraiser to assess the home’s value and make sure it hasn’t depreciated.
The bank will also make you pay for the appraiser. It will cost you anywhere from a few hundred dollars to over $500, so if you go this route, you should be confident that your home has appreciated to the point where your bank will undoubtedly cancel your PMI.
You should also read the PMI terms of your mortgage, as every bank is different; some mortgage companies drop your PMI when your LTV hits 80%, while others require a 78% LTV.
You also have the option of refinancing your mortgage once you think you’ve reached 80%. When interest rates are low, refinancing can be a good idea, but refinancing can also be expensive, since you have to pay the same closing costs and fees that you paid when you took out the initial mortgage.
As we touched on earlier, you also pay a form of mortgage insurance when you take out Federal Housing Administration loans. Known in the FHA program as mortgage insurance premiums, you pay MIP as part of your monthly mortgage payment. There is functionally no difference between MIP and PMI.
FHA loans originating before 2013 have different cancellation terms than post-2013 loans. For loans prior to 2013, MIPs for 15-year mortgages with LTV less than 78% are automatically cancelled when you reach 78%; for mortgage terms greater than 15 years with LTV less than 78%, you need MIP for at least five years plus 78% LTV for cancellation. For mortgage terms greater than 15 years and an LTV greater than or equal to 78%, you’re required to have MIP for five years.
As of 2013, the cancellation policy is a little different. For example, if your LTV is greater than 90% on an mortgage term, you need MIP throughout the life of the loan. For mortgages with LTV less than 90%, you need MIP for 11 years. If your LTV is greater than or equal to 78% but your loan term is greater than 15 years, you still need MIP for 11 years.
|Term||LTV (%)||Before 2013||After 2013|
|≤ 15 years||≤ 78||No annual MIP||11 years|
|≤ 15 years||> 78 - 90||Cancelled at 78% LTV||11 years|
|≤ 15 years||> 90||Cancelled at 78% LTV||Loan term|
|> 15 years||≤ 78||5 years||11 years|
|> 15 years||> 78 - 90||Cancelled at 78% LTV & 5 years||11 years|
|> 15 years||> 90||Cancelled at 78% LTV & 5 years||Loan term|
VA loans — the no-down-payment loans offered for servicemembers and veterans — don’t include MIP, but they do include a “funding fee”, which is a fee used to offset loans that go into default. You typically have the option of paying the entire fee up front with the closing costs or including it in your monthly mortgage payment.
USDA loans — mortgages for home buyers with low income for their area — offer split-premium MIP at low rates. For USDA loans, you pay a $1.00% up-front fee based on the size of the loan, followed by a 0.35% annual fee that’s paid on the remaining principal balance for the life of the loan.
Mortgage protection insurance is a form of life insurance that keeps making your mortgage payments if the primary earner dies. Otherwise, if you died and your family wasn’t able to make the payments, they’d lose the home.
Whereas PMI protects the lender, mortgage protection insurance protects the borrower. Mortgage protection insurance terms are typically the same length as your mortgage terms, so 15, 20, or 30 years.
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