What is Private Mortgage Insurance (PMI)?
What is PMI?
PMI stands for Private Mortgage Insurance. Lenders require it for anyone who owns less than 20% equity in his or her home or if the borrower is considered “high risk”.
PMI protects the lender in case of default and they are required to sell it at a loss. Foreclosed homes are often sold at less than their appraised value. Lenders will automatically cancel PMI once a borrower has reached 22% equity in their home, but it‘s possible to have it cancelled at 20%.
Although it’s an added cost, it’s helpful to borrowers because prior to PMI, banks only gave loans to those with a down payment of 20%. Now, banks will accept much smaller down payments and housing has become more accessible to everyone.
Borrowers do not shop for PMI rates like they do mortgage rates. The rates vary depending on the lending institution, amount of the loan, the amount of the down payment, the length of the loan and the borrower’s credit score. PMI payments are rolled into the monthly mortgage and are not paid separately.
Some borrowers avoid PMI by taking out a second loan to cover the remainder of the down payment. The second loan is often at a higher interest rate, so it’s important to check the match before considering this as an option.
How Much does PMI Cost?
The cost of private mortgage insurance will vary depending on several factors but it is possible to estimate the monthly cost. Each lender has their own chart that details their rate that can range from 0.20% to 1.50% of the balance of the original loan, based on credit score, down payment and loan term.
Steps to calculating PMI:
First find the loan-to-value (LTV) ratio by dividing the amount of the loan by the value of the house. If the house is valued at $300,000 and the down payment is $30,000, the loan will be $270,000. $270,000/$300,000=.9.
Multiply by 100 to get the percent .9X100 = 90%.
If the PMI table shows a rate of .70%, then the yearly premium is $1890 or the monthly payment is $157.50. Contact your local lending institution to find their PMI rates.
PMI doesn't change as the outstanding balance changes and information should be clearly detailed in a disclosure at closing.
Cancelling PMI
The federal Homeowner’s Protection Act states that the lender must remove private mortgage insurance once a borrower has 22% equity as long as there are no missed payments in the last 12 months and the loan wasn’t deemed “high risk”. The date should be given in writing in a PMI disclosure form with the mortgage. The Homeowners Protection act also allows the borrower to request that their lender remove the PMI once they have 20% equity in their home under the same circumstances. Regardless of missed payments, it is cancelled automatically after 15 years on a 30-year loan.
It is also possible to cancel private mortgage insurance if the value of the home increases. That value is automatically added to the equity and may push the value over the 20% requirement, although the burden of proof is on the homeowner. Borrowers should weigh the potential savings against the cost of a home appraisal.
The approximate timeline for automatic PMI cancellation:
| Number of Years to 22% Equity In a Home (for 5%, 10% and 15% down payment) | ||||||
|---|---|---|---|---|---|---|
| Interest Rate | 15 Year Mortgage | 30 Year Mortgage | ||||
| 5% | 10% | 15% | 5% | 10% | 15% | |
| 3% | 3 | 2.5 | 1 | 7.5 | 6 | 4 |
| 4% | 3.5 | 2.5 | 1.5 | 8.5 | 6.5 | 4.5 |
| 5% | 3.5 | 2.5 | 1.5 | 9.5 | 7.5 | 5 |
| 6% | 4 | 3 | 2 | 10.5 | 8.5 | 5.5 |
| 7% | 4 | 3.5 | 2 | 11.5 | 9 | 6.5 |
| 8% | 4.5 | 3.5 | 2.5 | 12 | 10 | 7 |
| 9% | 4.5 | 3.5 | 2.5 | 13.5 | 11 | 8 |
| 10% | 5 | 3.5 | 2.5 | 14 | 12 | 9 |
Steps to Follow to Cancel Private Mortgage Insurance:
- The request must be made in writing.
- The loan must be current, with a good payment history.
- The lender may require the borrower to certify that there are no other liens (such as a second mortgage) on the home.
- The lender can also require the borrower to provide evidence (for example, an appraisal) that the value of the property hasn’t declined below the value the initial purchase price. If the value of the home has decreased, the bank may not cancel PMI.