Skip To Content

Private Mortgage Insurance Basics

Private Mortgage Insurance, also called PMI, is a type of mortgage insurance often required by lenders when home buyers put down less than 20% and have a conventional loan. PMI is put in place by the lender as a way to protect against possible non-payment of the loan in the future. 

Types of Private Mortgage Insurance (PMI)

1 – Borrower Paid Mortgage Insurance

The most common type of PMI is Borrower Paid Mortgage Insurance (BPMI) and is typically an additional monthly fee you pay with your mortgage payment and is calculated based on the original purchase price. You’ll pay BPMI until you have 22% equity in your home. Most lenders automatically cancel PMI once it hits 22%.  

You can reach out to your lender once you have 20% equity in your home and ask them to cancel your PMI. Your loan must be current, with a satisfactory payment history, and not have any additional liens on your home for the lender to consider canceling early. 

BPMI is the most common mortgage insurance option, but depending on your situation there are other possibilities your lender might present you. 

2 – Single Premium Mortgage Insurance

Single Premium Mortgage Insurance (SPMI), or single payment mortgage insurance, allows you to pay the insurance upfront with one lump sum. This payment is usually made at closing or financed by the mortgage. The main benefit is lowering your monthly payment allowing you to borrow more. With this insurance, you also won’t need to refinance to get rid of it later or wait until you have 20% to 22% equity to cancel.  

3 – Lender-Paid Mortgage Insurance

Lender-Paid Mortgage Insurance (LPMI) means your lender pays the mortgage insurance in a way. Technically, you are still paying for LPMI because it is built into the loan in the form of a slightly higher interest rate. Because it is part of the loan, you can’t cancel it or decrease your interest rate once you have 20% to 22% equity and it is not refundable. 

The only way to lower your monthly payment is to refinance your loan. The main benefit of this option is that your monthly payment may be lower than with BPMI allowing you to qualify for a bigger loan. 

4 – Split-Premium Mortgage Insurance

The Split-Premium Mortgage Insurance is by far the least common and is a hybrid between BPMI and SPMI. It is a good option for those with a high debt to income ratio. With split-premium, you would pay part as a lump sum at closing and part monthly with your mortgage. This type of insurance may allow you to qualify to borrow enough to purchase the home you want. 

5 – Federal Home Loan Mortgage Protection (MIP)

This type of mortgage insurance is only available for FHA loans or mortgages. Federal Home Loan Mortgage Protection is known as MIP and required on any FHA loan with a down payment of 10% or less. It can’t be removed without refinancing and requires both an upfront payment and monthly payments. For loans with an 11% down payment or more, buyers still can’t remove MIP for 11 years.  

 

What is the cost of Private Mortgage Insurance

As of November 2020, the average range for PMI premium rates was between 0.58 and 1.86 percent. Credit score and your loan to value (LTV) ratio influence how much your premiums will cost. If your credit score is higher, your PMI will be lower. If you have a high LTV, you are likely to have a more costly PMI. 

 

How do I avoid paying Private Mortgage Insurance?

Take out two loans: When a buyer doesn’t have a 20% down payment, it is possible to take out a second, smaller loan, usually at a higher interest rate, to cover the 20% down. The amount from the second loan means PMI is not required on the first loan. 

Put down 20 percent: If you are able to put a down payment of 20% or more on your loan, you will be able to avoid PMI. For a conventional loan, 20% down is ideal. 

Cancel PMI later: Many homeowners start with PMI but are able to cancel it later. When your home loan balance reaches 80 percent of the home’s original value, you can reach out to your lender about dropping the insurance premiums. 

Conclusion:

For many first time homebuyers, PMI is a necessity due to the challenge of saving 20% of your desired home’s purchase price. It is often worth the extra money and many are able to deduct it at tax time. Work with your lender to come up with the best option for your situation. 

Are you ready to start searching for your dream home? Reach out to us at {contact} and let us help you get started!  

 

Trackback from your site.

Leave a Reply

*
*