Private Mortgage Insurance (PMI): When You Need It and How to Remove It

Private mortgage insurance, or PMI, is a type of insurance that protects the lender — not you — if you default on your mortgage. It is required on conventional loans when your down payment is less than 20% of the home's purchase price. While PMI adds to your monthly cost, it also makes homeownership possible for buyers who cannot put down a full 20%.

When Is PMI Required?

PMI is triggered when your loan-to-value ratio (LTV) exceeds 80% on a conventional mortgage. In simple terms, if you borrow more than 80% of the home's value, the lender considers the loan riskier and requires insurance to offset that risk.

Key distinctions:

• Conventional loans: PMI is required when LTV is above 80%. It can be removed once you reach 80% LTV.
• FHA loans: FHA mortgage insurance premium (MIP) is different from PMI. MIP is required regardless of down payment and, if you put down less than 10%, it lasts for the life of the loan.
• VA and USDA loans: These do not require PMI, but they have their own funding or guarantee fees.

How Much Does PMI Cost?

PMI typically costs between 0.3% and 1.5% of the original loan amount per year, depending on your credit score, down payment size, and the loan program. Here is what that looks like in practice:

• On a $300,000 loan with a 0.5% PMI rate: $1,500 per year, or $125 per month.
• On a $400,000 loan with a 0.8% PMI rate: $3,200 per year, or about $267 per month.

Your credit score has a significant impact on PMI rates. A borrower with a 760 credit score might pay 0.3% per year, while a borrower with a 660 score might pay 1.0% or more for the same loan. Improving your credit score before applying can save you hundreds of dollars per month.

Types of PMI

PMI can be structured in several ways:

• Borrower-paid monthly PMI: The most common type. A monthly premium is added to your mortgage payment and can be cancelled once you reach 80% LTV.
• Single-premium PMI: You pay the entire PMI cost upfront at closing as a lump sum. This eliminates the monthly charge but requires more cash at closing. This amount may be financed into the loan.
• Lender-paid PMI (LPMI): The lender pays the PMI in exchange for a higher interest rate on your loan. The advantage is no separate PMI payment, but the disadvantage is you cannot remove it — the higher rate is permanent unless you refinance.
• Split-premium PMI: A combination where you pay part upfront and part monthly, reducing the monthly cost while keeping the upfront cost lower than single-premium.

How to Remove PMI

The Homeowners Protection Act of 1998 gives you the right to cancel PMI on conventional loans under specific conditions:

1. Request cancellation at 80% LTV: When your loan balance reaches 80% of the original purchase price or appraised value at the time of purchase (whichever is less), you can request cancellation in writing. You must be current on payments with a good payment history.
2. Automatic termination at 78% LTV: The lender is required by law to automatically cancel PMI when your loan balance reaches 78% of the original value, based on the original amortization schedule.
3. Midpoint termination: If you have not yet reached 78% LTV by the midpoint of your loan term (year 15 on a 30-year mortgage), the lender must cancel PMI at that point.
4. New appraisal: If your home has appreciated significantly, you may be able to request a new appraisal to demonstrate that your current LTV is below 80%. Some lenders allow this after 2 years of ownership.
5. Refinancing: If your home has gained enough equity, refinancing into a new loan with an LTV of 80% or less eliminates PMI entirely.

Is Putting Down Less Than 20% a Bad Idea?

Not necessarily. PMI is a cost, but it is also a tool that enables homeownership sooner. Consider these factors:

• Home values in most markets appreciate over time. Buying now with PMI and building equity may be financially superior to waiting years to save 20%.
• PMI is temporary on conventional loans. Once you reach 80% LTV, it goes away.
• The tax benefits of homeownership (mortgage interest deduction, property tax deduction) may partially offset the cost of PMI.
• Rental payments build zero equity. Even with PMI, a portion of every mortgage payment reduces your loan balance.

Understanding your PMI options is an important part of choosing the right conventional loan structure. The mortgage team at Home Financial Group can run the numbers on each PMI option so you can see exactly how they affect your monthly payment and total cost over time.