PMI: Back to Basics for Private Mortgage Insurance... or Not

Updated: Sep 19, 2024

If you pay less than 20% of the purchase price of your home, you will likely be on the hook for private mortgage insurance. While insurance rates fluctuate daily, these payments can add up after a while. It can be a couple of hundred dollars per month until you have enough equity in your home. At this point, banks and mortgage lenders are legally required to stop charging insurance premiums.

That being said, is this type of insurance mandatory for those who cannot cover the 20% down payment? With a little research, you can avoid this insurance altogether or have it removed. In this article, Mortgage Professional America will discuss everything you need to know about private mortgage insurance. We will explore how much it will cost you as well as how to have it removed entirely if you want to avail of that option.

For our usual audience of mortgage professionals, please share this article with any clients who have questions about private mortgage insurance.

What is private mortgage insurance?

Private mortgage insurance (PMI) is a type of mortgage insurance that you must pay for a conventional loan when you make a down payment of under 20% of the purchase price of the property. One of the main reasons for PMI is to protect the bank or mortgage lender if you are unable to make payments on your home loan. In essence, it covers the mortgage in case you default. 

Most lenders offer low down payment programs. This allows you to make a down payment below the usual amount. To gain that flexibility, you will have to pay PMI premiums.

Lenders also need coverage for down payments under 20% of the purchase price. They require that you own a smaller stake in your property. However, you can request to stop paying PMI when you have reached the needed equity in your home.

How to avoid paying private mortgage insurance

If you prefer to avoid making private mortgage insurance payments altogether, there are some options available, such as taking out a loan. Here are four ways to avoid paying PMI:

1. large down payment
2. FHA or USDA loan
3. VA loan 
4. piggyback loan

Here is a closer look at each option if you want to avoid paying PMI:

1. Make a large down payment 

The most common type of PMI is borrower-paid private mortgage insurance (BPMI). This adds an insurance premium to your regular mortgage payment. If you make a large down payment of at least 20%, you can avoid BPMI altogether. You can also ask your lender to remove the PMI after you have reached 20% equity in your home. BPMI is automatically removed after you have reached 22%.

Want to learn how much the usual homebuyer pays for down payment in the US? Check out this article on the average down payment on a house.

2. Get an FHA or USDA loan

FHA loans and USDA loans carry mortgage insurance premiums and guarantee fees. These are both equivalent to mortgage insurance. The one exception is an FHA loan that carries a down payment or equity amount of at least 10%. In that case, you would pay a mortgage insurance premium (MIP) for 11 years.

Still, if you take out either of these loans, you can avoid having to pay for PMI. Just make sure that it exceeds the amount of down payment required.

If you do not have an idea about which type of loan to apply for, you can ask a competent mortgage broker. They can help you sort out your financial capacity and determine if an FHA or USDA loan is right for you. Find the top names in the mortgage industry on our Best in Mortgage page.

3. Go for a VA loan

VA loans are the only home loans without true mortgage insurance. Instead, this type of mortgage has a one-time funding fee that is paid either at closing or built into the loan amount. The size of the funding fee differs depending on the amount of your equity or your down payment and whether it is a subsequent or first-time use. It is also based on the type of loan you get, and the total amount of money borrowed.

Learn more about VA loans in this video:

4. Consider a piggyback loan

A piggyback loan allows you to make a down payment of about 10% or more and a second mortgage. Both loans will cover the additional amount required to get you to 20% equity on your initial loan. The second home loan will be in the form of a home equity line of credit (HELOC) or a home equity loan.

How much does private mortgage insurance cost?

When determining how much PMI you will have to pay as part of your regular mortgage payment, your lender will consider various factors including:

1. down payment amount
2. credit history 
3. type of loan

Let’s look at each factor to understand how lenders determine your private mortgage insurance fees: 

1. Down payment amount

The down payment amount is an important factor as it gives banks and mortgage lenders a glimpse of your financial capacity. If you make a smaller down payment, you will be seen as a greater risk to the bank or mortgage lender. This means that the lender could potentially lose a bigger investment if you default on your loan and if your property is foreclosed. 

Due to this added risk, your lower down payment will mean that your regular mortgage payments will be higher. In turn, it will take longer before you can cancel your PMI. The larger amount of mortgage repayments can also make it more difficult for you to pay your dues.

If you fail to make your mortgage payments, you will be charged with higher PMI premiums. To reduce the amount of PMI that you need to pay, increase your down payment even if it is less than 20%.

Curious to find out how much you should pay for a down payment on a house? Check out this video about comparing a 5% versus a 20% down payment when buying a property:

To get our take on this issue, read our article on how much down payment you should make.

2. Credit history

To ensure you have been a responsible borrower in the past, the bank or mortgage lender will investigate your credit history. This is used as an indicator of how reliably (or unreliably) you have repaid borrowed money. For instance, a higher credit score can indicate a few different things, such as:

• you promptly pay your bills
• you avoid maxing out your credit limit
• you borrow only as much money as you can repay
• you consistently make more than the minimum payments on accounts, credit cards, etc. 

Once you have proven that you are a responsible borrower who consistently pays back the money you borrow, lenders might charge you with less PMI premiums. You will also be deemed low risk if you have a good credit history and high credit score.

On the other hand, the lender will likely trust you less in your ability to responsibly manage your debt if you have a lower credit score. This might also result in your lender charging you with a higher PMI premium.

For more on credit scores and how they affect your standing as a borrower, here’s our guide on credit scores when buying your dream home.

3. Type of loan

The amount you are required to pay in PMI can also be influenced by the type of loan that you will take out. A fixed-rate loan, for instance, can reduce the amount of risk involved with the loan since the rate will remain constant. This means that the amount of mortgage repayments will be consistent. If you are seen as less of a risk by the bank or mortgage lender, your private mortgage insurance would be lower. It is also likely that you will pay less. 

On the other hand, adjustable-rate mortgages (ARMs) carry added risk since it is more difficult to predict your future mortgage repayments. In other words, your mortgage insurance rate may be higher with an adjustable-rate mortgage. This is also why this type of loan is considered as a mortgage that moves with the current mortgage rates in the US.

Still, ARMs are popular due to their lower initial interest rates compared to fixed-rate mortgages. With more affordable mortgage repayments per month, you will be able to pay toward the principal amount. This builds equity more quickly than fixed-rate mortgages. It also reduces the amount of PMI that you need to pay.

How can private mortgage insurance be removed?

Here are some options on how to remove your private mortgage insurance:

1. build equity
2. contact lender once 20% equity is reached
3. get home appraisal
4. refinance your mortgage

Here is a closer look at these four options:

1. Build equity

If you build equity in your home over time, your lender is legally required to stop charging private mortgage insurance premiums. This happens when your balance reaches 78% of the original loan, or you reach 22% equity.

For FHA loans, you can cancel your mortgage insurance premiums if you make a down payment of at least 10% and when you hit the 11-year mark on your repayment schedule.

Check out these three ways on how to build equity on your real estate property:

2. Contact lender once 20% equity is reached

If your lender does not inform you about removing your PMI, contact them once you've reached 20% equity. You can also speed up that automatic PMI cancellation when your balance reaches 80% (instead of just 78%) of the original loan. It will be easier for you to request that they cancel your PMI at this point. 

3. Get home appraisal 

You can reach 20% equity in your home aside from paying down your principal. If the value of your property has appreciated since you bought it, you can contact your lender to get a professional home appraisal. This usually costs around $500, according to a survey by the National Association of Realtors (NAR).

4. Refinance your mortgage

Another option to remove PMI is to refinance your mortgage, which itself includes a home appraisal. While this process may cost a little more money, it makes sense if your initial mortgage has a higher interest rate.

When to make private mortgage insurance payments

To make PMI payments, there are three primary schedules. The options open to you differ among different banks and mortgage lenders, but typically these include the following:

• Monthly: Paying your PMI premiums every month along with your mortgage payment remains the most common payment method. While it adds to the size of your monthly mortgage bill, it also lets you spread the premiums out over the entire year.
• Upfront: This means you can pay the entire premium amount for the year all at the same time. While your mortgage payments will be lower each month, you will have to budget for the bigger annual expense. If you move within the year, you might be unable to get a portion of your PMI refunded.
• Hybrid: Hybrid payment means you pay some of the PMI upfront and then spread the rest out with monthly payments. This option is a good choice if you have extra cash early in the year and would like to limit your housing costs each month.

Navigating private mortgage insurance

Whether getting a PMI is the right financial move for you will ultimately depend on your personal goals and financial situation. The same is true in terms of how much and when you should pay. However, since there are ways to avoid it, you can worry less about gathering funds for your PMI premiums on top of repaying your mortgage.

Overall, it is important that you ask your mortgage broker aside from conducting your own research. It could end up making the difference between saving or spending more.

Are you a homeowner who is paying for private mortgage insurance premiums? Share your tips and insights in the comments section below