What is Private Mortgage Insurance?
Private mortgage insurance(PMI) is a type of insurance that mortgage lenders require when borrowers put less than 20% down on their home.
If you’re purchasing a home with little money down, you’ve probably heard of it already. PMI was put into place to protect lenders in case the homebuyer defaults on the loan. Since the borrower has less than 20% equity in the property, and the home market is always fluctuating, PMI helps mitigate the lenders risk.
While private mortgage insurance doesn’t help or protect the borrower, it does offer a way to become a homeowner if you don’t have a large downpayment saved up yet.
The most common private mortgage insurance is borrower paid (BPMI), or simply just known as PMI. There is also lender paid PMI (LPMI), where the lender “pays” the mortgage insurance for you.
When Does Private Mortgage Insurance Go Away?
If you’re in a conventional loan, borrower paid PMI will automatically cancel once your loan balance reaches 78% of the original value of your home. The original value generally means the contract sales price or the appraised value at the time of sale. If you’re in a government loan like an FHA or USDA loan, private mortgage insurance will stay on for the life of the loan.
PMI on FHA & USDA Loans
FHA and USDA loans almost always require PMI for the life of the loan, regardless what your loan balance or equity is. While these programs are fantastic options to get borrowers into homes without a large downpayment, the mortgage insurance costs will add up to a significant amount over time.
Because of this, we recommend refinancing into a conventional loan once your loan balance gets below 80% of your appraised value.
PMI on Conventional Loans
Private mortgage insurance on a conventional loan will automatically cancel when your balance reaches 78%. However, you do have the right to request that your mortgage servicer removes the mortgage insurance. Either when your balance reaches 80%, or if value of your home has risen and you can get an appraisal to prove you have at least 20% equity build up.
Many people don’t know you can do this, as long as you meet the following criteria you may be eligible to cancel PMI at 80%:
- You must request the cancelation in writing
- You must have a satisfactory payment history
- You must be current on all of your payments
- You may be required to certify that there are no additional liens on your home
- You may be required to get an appraisal to provide evidence that the property value hasn’t declined below the original home value
What Is Lender Paid PMI?
This sounds great right? It’s important to remember that it does come with a cost, usually by slightly increasing your interest rate. This higher rate allows the lender to cover the cost of private mortgage insurance.
You may get a lower monthly mortgage payment with lender paid PMI vs borrower paid PMI, which means you could possibly qualify for more home.
Unlike borrower paid PMI, lender paid PMI cannot be cancelled. Since the mortgage insurance is built into the interest rate, the rate will not go down once you reach 20-22% equity in your house. It takes the average borrower 11 years to gain enough equity to cancel borrower paid PMI, so if you only plan on being in your home for 5-10 years lender paid PMI may be a great option for you.
Private Mortgage Rates For 2020
Generally most private mortgage insurance companies will base policy rates on the loan amount, credit score, and the percentage of the homes value that would be paid out during a claim.
As a mortgage broker, we have several lenders who offer lower mortgage insurance rates than standard conventional rates.
To give a general range as an example, most mortgage insurance premiums range anywhere from 0.5% all the way up to 5% of the original loan amount per year. That means if $250,000 was borrowed and the annual premium was 1%, the homeowner would have to pay $2,500 per year, or $208.33 per month to insure their mortgage.
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