In this article, I’ll tell you how private mortgage insurance (PMI) works, when you need it, how much it costs, and how to remove PMI.
If you’re doing a new loan that requires PMI, I’ll show you an easy way to save money by making sure you get the lowest payment.
By the way, if you have an FHA loan, then you'll want to know how to get rid of FHA mortgage insurance.
How does PMI work?
You need PMI if your down payment is less than 20%. The lender sets it up for you. Then they add the PMI premium payment to your monthly mortgage bill. Each month you pay your lender for:
- Principal & interest for your loan
- Property taxes.
- Homeowner’s insurance.
What does PMI cover?
PMI protects the lender—not you. So if you stop making payments on your loan, the insurance covers the lender’s losses.
It’s risky for a mortgage company to lend you money to buy a home if you have less than a 20% down payment. Think about it. What if you were to purchase a house, put 5% down and then stop making your monthly payments?
The lender would try to recover the amount you owe on the mortgage by selling the house. But they’d end up losing money. And since lenders aren’t in business to lose money, they’d stop making loans to people who have less than 20% down.
Here’s where PMI steps in. It covers the lender’s losses thereby reducing the mortgage company’s risk. If low down payment mortgages aren’t all that risky, then the lender makes more of them.
So, thanks to PMI, you can get the mortgage you need to buy the home you want - without coming up with a 20% down payment.
PMI clears a path to homeownership, especially for first-time buyers. 80% of first-time homebuyers make a down payment that’s less than 20% of the sales price, according to the National Association of Realtors.
How much is PMI?
It depends on which lender you choose to do your loan. Here’s how it works:
- You choose the lender.
- The lender picks the mortgage insurance company.
- The mortgage insurance company sets the premium.
- The premium is the amount you pay each month for PMI.
There are five big private mortgage insurance providers. Each charges a different amount for PMI. Lenders use a mix of the providers. So your PMI payment could be high or low depending on which lender you choose.
If you want the lowest PMI payment, then shop and compare a few lenders. Do it when you shop around for the lowest interest rate and fees. Here are a few tips on shopping:
- Get a quote in writing that includes the monthly PMI payment, interest rate, points, fees and other charges.
- Don’t give a lender your private info like your Social Security Number until after you see their quote.
- Compare it with quotes from other lenders.
Use our free mortgage insurance calculator. Check all five PMI companies at the same time and see the lowest PMI payment instantly. It’s the ideal way to shop online. Mortgage Calculator with PMI.
Your PMI automatically terminates when you pay your loan down to 78% of your home’s value - the value when you got the loan. Use the appraised value or purchase price when you closed on your loan, not today’s value.
It takes a long time for PMI to auto-terminate. To give you an idea, you’ll pay PMI for
- 7-years if you started your loan at 90% of the property value, and
- 9-years if you started your loan at 95% of the property value.
- You’ll reach the 78% mark much faster if you pay extra or if you have a 20 or 15-year loan. Check with your lender for exact numbers.
Auto-termination works only if you still live in your home or if it’s a second home. PMI won’t auto-terminate on investment properties, 2-4 unit homes, or if you’re behind on your mortgage payments.
How to get rid of mortgage insurance early
Private mortgage insurance is expensive. You might save yourself thousands of dollars by canceling it early - before it auto-terminates.
You have two ways to get out of PMI early.
1. Ask the lender to cancel it.
The lender will want to know how much your home is worth. They’ll order an appraisal to find out. The appraisal will cost you about $500. Don’t be surprised if the lender charges a processing fee too, so ask.
If you have the loan for less than 2-years - Sorry, but the lender won’t drop your PMI unless you can show that you made home improvements that increased the value.
If you had your loan for more than 2-years but less than 5-years - Your current loan balance must be less than 75% of the current appraised value.
If you had your loan for more than 5-years - Your current loan balance must be less than 80% of the current appraised value.
2. Refinance - get a home loan that doesn’t have PMI.
Before you refinance, the lender will order an appraisal to get the current value of your home. When you get the number, set your new loan amount so that it's no more than 80% of the appraised value. Then you can say goodbye to PMI forever.
Check these free online tools to get an idea of what your home is worth.
Don’t take the online estimation too seriously. If you doubt it, then check with your local real estate agent. Your agent will give more insight into the market value of your property - more than any online estimator.
Decide if a refinance is worthwhile. Always shop and compare the cost of your refinance with how much you'll save. You’ll find some useful tips including how to get the lowest mortgage rates in my article: How to get an accurate rate quote in 1 minute.
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- Questions? Call or message me at 773-770-4713.
- Schedule 15 mins to talk with me.