For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage. Show It is not the same thing as homeowner's insurance. It's a monthly fee, rolled into your mortgage payment, that’s required if you make a down payment less than 20%. While PMI is an initial added cost, it enables you to buy now and begin building equity versus waiting five to 10 years to build enough savings for a 20% down payment. While the amount you pay for PMI can vary, you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed. A $200,000 HOME: 5% DOWN VS. 20% DOWN
*Assuming an insurance rate of 0.51%; this cost can be cancelled from your payment once you reach 20% equity in your home for conventional loans, but not FHA loans **Does not include property tax and homeowner’s insurance payments Once you've built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment. If you're current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original appraised value of your home. If you choose to use PMI, be sure to talk with your lender about these specific details of your policy. Talk with your lender about what down payment makes the most sense for your financial situation. Remember, you have options! Private mortgage insurance (PMI) is insurance required by lenders when a borrower puts less than 20% down on a conventional loan. It's meant to protect the lender in the event that the borrower defaults. PMI can be cancelled once the borrower has at least 20% equity in the property. The PMI amount is determined by many different factors, similar to your interest rate—including FICO score, loan-to-value ratio,
debt-to-income ratio, property type, and occupancy. Learn more about private mortgage insurance here.
How you can avoid PMI depends on what type you have:
Let’s review how each type works in more detail, and what steps you can take to avoid paying either one. How To Avoid Borrower-Paid PMIBorrower-paid PMI (BPMI) is the most common type of PMI. BPMI adds an insurance premium to your regular mortgage payment. Let’s take a look at what home buyers can do to avoid paying PMI. Make A Large Down Payment You can avoid BPMI altogether with a down payment of at least 20%, or you can request to remove it when you reach 20% equity in your home. Once you reach 22%, BPMI is often removed automatically. Take Out An FHA Or USDA Loan While it’s possible to avoid PMI by taking out a different type of loan, Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans have their own mortgage insurance equivalent in the form of mortgage insurance premiums and guarantee fees, respectively. Additionally, these fees are typically around for the life of the loan. The lone exception involves FHA loans with a down payment or equity amount of 10% or more, in which case you would pay MIP for 11 years. Otherwise, these premiums are around until you pay off the house, sell it or refinance. Take Out A VA Loan The only loan without true mortgage insurance is the Department of Veterans Affairs (VA) loan. Instead of mortgage insurance, VA loans have a one-time funding fee that’s either paid at closing or built into the loan amount. The VA funding fee may also be referred to as VA loan mortgage insurance. The size of the funding fee varies according to the amount of your down payment or equity and whether it’s a first-time or subsequent use. The funding fee can be anywhere between 1.4 – 3.6% of the loan amount. On a VA Streamline, also known as an Interest Rate Reduction Refinance Loan, the funding fee is always 0.5%. It’s important to note that you don’t have to pay this funding fee if you receive VA disability or are a qualified surviving spouse of someone who was killed in action or passed as a result of a service-connected disability. Take Out A Piggyback Loan One other option people look at to avoid the PMI associated with a conventional loan is a piggyback loan. Here’s how this works: You make a down payment of around 10% or more and a second mortgage, often in the form of a home equity loan or home equity line of credit (HELOC), is taken out to cover the additional amount needed to get you to 20% equity on your primary loan. Rocket Mortgage® doesn’t offer HELOCs at this time. Although a HELOC can help avoid the need for PMI, you’re still making payments on a second mortgage. Not only will you have two payments, but the rate on the second mortgage will be higher because your primary mortgage gets paid first if you default. Given that, it’s important to do the math and determine whether you’re saving money or if it just makes sense to make the PMI payments. How To Avoid Lender-Paid PMIAnother option is for your lender to pay your mortgage insurance premiums as a lump sum when you close the loan. In exchange, you’ll accept a higher interest rate. You may also have the option to pay your entire PMI yourself at closing, which would not require a higher interest rate. Depending on the mortgage insurance rates at the time, this may be cheaper than BPMI, but keep in mind that it’s impossible to “cancel” lender-paid PMI (LPMI) because your payments are made as a lump sum upfront. If you wanted to lower your mortgage payments, you’d have to refinance to a lower interest rate, instead of removing mortgage insurance. There’s no way to avoid paying for LPMI in some way if you have less than a 20% down payment. You can go with BPMI to avoid the higher rate, but you still end up paying it on a monthly basis until you reach at least 20% equity. In that case, you’re back to the original amount from the BPMI scenario. How long do you pay PMI?After you've bought the home, you can typically request to stop paying PMI once you've reached 20% equity in your home. PMI is often canceled automatically once you've reached 22% equity. PMI only applies to conventional loans. Other types of loans often include their own types of mortgage insurance.
How can you avoid PMI?One way to avoid paying PMI is to make a down payment that is equal to at least one-fifth of the purchase price of the home; in mortgage-speak, the mortgage's loan-to-value (LTV) ratio is 80%. If your new home costs $180,000, for example, you would need to put down at least $36,000 to avoid paying PMI.
What is a good PMI?On average, PMI costs range between 0.22% to 2.25% of your mortgage. How much you pay depends on two main factors: Your total loan amount: As a general rule, PMI expenses are higher for larger mortgages. Your credit score: Lenders typically charge borrowers with high credit scores lower PMI percentages.
When can I remove PMI?You have the right to request that your servicer cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage.
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