Homebuyers worry about paying private mortgage insurance (PMI), which is another concern in addition to the down payment and closing costs.
Lenders who offer conventional loans need PMI if your down payment is less than 20%. Financial institutions that provide government-backed mortgages ask for insurance too. But the greatest limit is only up to 10% of the home’s sale price. Insurance protects the lender from losses if you cannot repay the loan.
For the first few years of the loan, it’s around $30 to $70 every month for every $100,000 you borrow. Once you’ve built equity or reached a certain point in your mortgage term, you may cancel it.
The question is, how much home equity do you need? When in your mortgage term can you cancel for a PMI? Find out the answers to these below.
Know the PMI requirements, cancellation, and termination!
Express Takeaways
- Mortgage lenders need insurance to protect them from possible losses.
- PMI is for conventional loans wherein a mortgage is not part of any government program
- Government-backed mortgages also need insurance. But the need for a down payment is lower.
- The PMI or other insurance payment is part of the monthly mortgage payments.
- It is possible to avoid paying for PMI by putting a large down payment on conventional loans.
- Equity may help homeowners to stop paying for PMI according to the terms set by the law.
What Is PMI?
PMI is an insurance that protects lenders who offer conventional loans. This type of mortgage does not receive a guarantee from the government. So, the loans are riskier making the lenders ask for a down payment as high as 20%.
Financial institutions that provide government-backed mortgages also ask for insurance. But, they only need a down payment of up to 10% of the home’s sale price. A government agency insures the loans and agrees to pay a part of it if you are unable to pay. So, the loans are less risky allowing lenders to ask for a smaller upfront payment.
Insurance protects the lenders in case you are unable to repay the loan. It applies to those who provide conventional or government-backed mortgages. Lenders need it, especially if there is a high loan-to-value ratio.
What is a Loan-to-Value Ratio?
The LTV Ratio compares your loan amount to the appraised value of the property. A typical LTV ratio is 80%, and lenders consider rates higher than this a high loan-to-value ratio.
The loan amount is the principal balance you need to repay after putting in a down payment. While the appraisers determine the appraised value of your home.
When do Lenders Need Mortgage Insurance?
Mortgage lenders need private mortgage insurance in the following situations.
| Mortgage Program | Insurance |
| Conventional Loan | Need for a PMI if
|
| FHA Loans | An upfront and yearly Mortgage Insurance (MIP) for all FHA-insured loans. Down payment is up to 10% depending on your credit score. |
| VA Loans | None |
| USDA Loans | An upfront and annual fee but no need for a down payment. |
| HomeReady Mortgage | The percentage of mortgage insurance depends on the loan-to-value ratio. Down payment of at least 3% |
| HomePossible Mortgage |
The collection and cancellation of insurance may vary per program.
How does PMI Work?
Once a lender determines you need a PMI, they will contact a private insurance provider. This company will provide the insurance plan terms before closing the loan.
Monthly mortgage payments now include the PMI which also covers the principal, interest, and taxes. The lender may collect the payments or have a servicer do it for them.
Payment for PMI continues until you can cancel it. The home equity or the agreed terms with the lender may allow it to happen.
Government-backed mortgages may have their own rules and limits on insurance.
How Does Insurance Work on Government-Backed Mortgages?
| Mortgage Program | Determination of Insurance | Length of payment | Cancellation |
| FHA Loan | The loan-to-value ratio and mortgage term | 11 years or throughout the mortgage term | Possible at a 78% loan-to-value ratio and 5 years for a 15-year term |
| VA Loan | None | ||
| USDA Loan | Principal Balance | Once for the upfront loan guarantee fee.
A fixed annual fee for the life of the loan. |
None |
| HomeReady Mortgage | Loan-to-value ratio and mortgage term | Until the home equity reaches 20% | |
| HomePossible Mortgage | |||
How Much Is PMI?
A PMI may cost $30 – $70 monthly for every $100,000 you borrow. Government-backed mortgages set different insurance pricing.
| Mortgage Program | Insurance Amount |
| FHA Loans | A 1.75% Up-Front Mortgage Insurance Premium of the loan amount.
0.45% to 1.05% annual mortgage insurance (MIP). |
| VA Loan | None |
| USDA Loan | An upfront guarantee fee that does not exceed 3.5% of the loan amount.
An annual fee that does not exceed 0.5% of the average unpaid principal balance. |
| HomeReady Mortgage | 6% to 25% depending on the loan-to-value ratio. |
| HomePossible Mortgage |
Aside from the down payment, mortgage lenders may also consider other factors.
What are the Factors That Influence Your Private Mortgage Insurance Requirements?
The need for private mortgage insurance depends on the following factors.
Loan Type
A conventional mortgage is a loan type from private lenders. It has no government backing, so lenders need private mortgage insurance because it is riskier for them.
Down Payment
Most conventional mortgages need at least a 20% down payment. If you pay lower than this, it is risker for the lenders. So, they need a PMI for extra protection on the loan.
Transaction Type
Lenders may also ask for a PMI if you apply for a mortgage loan through refinancing. This is when you pay off your first mortgage with a new one that has better interest rates or terms.
There is no set waiting time until when you can refinance your current mortgage loan. But, the more you pay for the first mortgage loan’s balance, the more equity your home has. So, most of the time, equity matters to the lenders.
Home Equity
You build home equity over time by paying your mortgage and increasing the value of your house.
In percentage, the remaining balance is divided by the house’s current value. For instance, if you still owe $100,000, and your house now costs $250,000, you have 40% equity in the home.
Many lenders need a PMI if you have less than 20% home equity in the first mortgage.
How is a Mortgage Lender Different from a Servicer?
As mentioned above, monthly mortgage payments may be sent to a lender or via a servicer. Although both may collect payments, they are not exactly the same.
A mortgage lender is a financial institution where you borrow money to buy a house. A servicer sends your monthly statements and collects your payments. A lender and a servicer can be different companies.
Can You Avoid PMI?
If you want to avoid paying for PMI for lower monthly mortgage payments, you may:
- Save and stick to a budget until you can put in at least a 20% down payment
- Wait until your home equity is at least 20%
- Apply for a down payment assistance (DPA) program
DPA programs may help pay a part of the down payment if you choose to get a conventional loan. It’s not as much as 20% of the home’s sale price, but it may provide extra money for you to avoid paying PMI. The financial assistance may also apply to government-backed mortgages. Visit Home Buyer Wallet to find a list of all financial aids available.
How Can You Get Rid of PMI?
The good news is that you may remove PMI from your monthly mortgage payments. You may request its cancellation, or your lender will end it.
PMI Cancellation
A PMI cancellation is possible once the principal balance is 80% of the home’s original value.
It may happen on the date set in the closing disclosure. If you pay more monthly, you may request PMI cancellation earlier on the set date.
The other criteria for PMI cancellation also include:
- Requesting for it in writing
- Maintaining a good payment history
- Ensure that you have no second mortgage on your home
- Show proof of the house’s current value such as an updated appraisal
- Your lender can also end the PMI according to federal law
Automatic PMI Termination
The federal Homeowners Protection Act (HPA) outlines the automatic termination of PMI. It’s applicable when the principal balance reaches 78% of the home’s value. But, you should have been current on your payments before you expect it to happen.
Final PMI Termination
The HPA also states that a lender must follow the PMI termination rules. It can happen once you are halfway through your mortgage term.
Private mortgage insurance (PMI) protects lenders offering a conventional loan. It is $30 to $70 monthly for every $100,000 you borrow. It can be an extra fee to your monthly mortgage payment. But, saving for a down payment and building your home equity may help you avoid it. Down payment assistance (DPA) programs may also help pay part up to 20% of the home’s sale price upfront. Applying for a PMI cancellation is possible or a lender may end it once you reach the terms set by federal law. However financial aid is available for a down payment. So, qualifying for conventional loans and avoiding PMI is possible. Government-backed mortgages also allow down payments lower than 20%. So, why not find a DPA program now and start house hunting?
Article Sources
Homebuyer Wallet requires its writers to get information from original and reliable resources. Please see our editorial policy to learn more about our standards for producing factual information and content.
- Consumer Financial Protection Bureau, “What is private mortgage insurance?, https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/”
- Freddie Mac, “Breaking down PMI, https://myhome.freddiemac.com/buying/breaking-down-pmi”
- Pinkowish, T. (2021). Residential Mortgage Lending: Principles and Practices, 7th Edition (eTextbook). (S. Glassmeyer, Ed.). Mbition Publishing. https://www.theceshop.com/real-estate-books
- Consumer Financial Protection Bureau, “What is a loan-to-value ratio and how does it relate to my costs?, https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-to-value-ratio-and-how-does-it-relate-to-my-costs-en-121/”
- Consumer Financial Protection Bureau, “What is a conventional loan?, https://www.consumerfinance.gov/ask-cfpb/what-is-a-conventional-loan-en-117/#:~:text=A%20conventional%20loan%20is%20any,be%20conforming%20or%20non%2Dconforming.”
- Consumer Financial Protection Bureau, “Should I refinance?, https://files.consumerfinance.gov/f/documents/cfpb_should_i_refinance_handout.pdf”
- Consumer Financial Protection Bureau, “What’s the difference between a mortgage lender and a servicer?, https://www.consumerfinance.gov/ask-cfpb/whats-the-difference-between-a-mortgage-lender-and-a-servicer-en-198/#:~:text=Your%20mortgage%20lender%20is%20the,tasks%20for%20managing%20your%20loan.”
- U.S. Department of Veterans Affairs, “VA funding fee and loan closing costs, https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/”
- U.S. Department of Agriculture, “Upfront Guarantee Fee & Annual Fee, https://www.rd.usda.gov/files/RD-SFH-UpfrontFee1.pdf”
- FHA, “FHA Requirements, https://www.fha.com/fha_requirements_mortgage_insurance”
- Fannie Mae, “HomeReady mortgage, https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/homeready-mortgage”
- Fannie Mae, “Mortgage Insurance Coverage Requirements, https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B7-Insurance/Chapter-B7-1-Mortgage-Insurance-Loan-Guaranty/1032998381/B7-1-02-Mortgage-Insurance-Coverage-Requirements-08-07-2019.htm”
- Freddie Mac, “Home Possible Mortgage, https://sf.freddiemac.com/content/_assets/resources/pdf/fact-sheet/home_possible_factsheet.pdf”
- FHA, “FHA Loans and Mortgage Insurance Requirements, https://www.fha.com/fha_article?id=1373”
- Consumer Financial Protection Bureau, “When can I remove private mortgage insurance (PMI) from my loan?, https://www.consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202/#:~:text=You%20have%20the%20right%20to,when%20you%20received%20your%20mortgage.”
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