What is private mortgage insurance (PMI)?
4 min read
Written by Peter Khoury
Private mortgage insurance, also called PMI, is a form of insurance that protects the lender if you default on your mortgage payments.
A lender may require you to pay for private mortgage insurance in addition to your monthly mortgage payment.
PMI is usually applied to mortgages if the home buyer’s down payment is less than 20%. There are some cases in which you can avoid this, such as an 80/10 loan, but often times you’ll be saddled with PMI until your equity in the home exceeds 20%.
Once this happens you’re able to refinance and get rid of your PMI payment.
What are the Different Types of PMI?
Borrower Paid PMI
Borrower-paid PMI (BPMI) is the most common type of PMI. It is a loan that is made to a borrower who has a good credit history and who does not have the ability to make a substantial down payment. The lender will require the borrower to pay for private mortgage insurance (PMI) until the loan-to-value (LTV) ratio reaches 78% or less.
Lender Paid PMI
Lender-paid private mortgage insurance (LPMI) is a type of PMI that is arranged and paid for by your mortgage lender. You’ll typically pay for this service with a higher interest rate.
With lender-paid private mortgage insurance, your lender will pay the insurance premiums on your behalf. This means that you won’t have to pay for the PMI, but the higher interest rate will result in a higher payment. You should compare and see which one is cheaper monthly.
Can I buy out my PMI outright?
This is called a single premium buyout which means you are paying the entire insurance policy upfront instead of a monthly amount.
The trick here is to have a credit score so the buy-out is cheap and more affordable to do.
You should compare how many months you would be in monthly PMI vs. if you were to buy out the PMI and see which is cheaper.
What is the minimum to avoid PMI?
The best way to avoid PMI is to pay for your home with 20% down or you can opt-in for a lender paid PMI or Single Premium Buy Out.
You could always seek a second mortgage. The lender will lend up to 80 percent of the purchase price and another lender who will give you a second mortgage at 10% of the purchase price. You'll have to pay 10 or 20 percent down and then make monthly payments on the remaining balance.
You may also be able to qualify for a government-backed mortgage that doesn't require private mortgage insurance (PMI). Contact your state housing finance agency (HFA) for more information about these programs.
What are the rates typically for PMI?
PMI rates are set between the balance of the down payment and your credit score. You will get a discount on the rate if you are a first-time home buyer.
Typically PMI rates range from .2% - 1.2% depending on how much the down payment is and your credit score.
How can I get rid of PMI Early?
You can get rid of PMI early by refinancing your mortgage. This is a good option if you have a loan that has a low rate and is less than 20% of the value of your home.
If you’re not sure if you can refinance, talk to your lender. They can help you figure out if it’s a good idea for you.
If you have been on your mortgage for 2 years and you have seen an increase in your value, sometimes the mortgage servicer allows you to get a Broker Price Opinion (BPO) or a full appraisal to set the value.
At this point if your loan is under 80% of the new value of the home, the servicer may grant a removal of PMI.
Can PMI be removed if the home value increases?
Yes, private mortgage insurance (PMI) can be removed if the home value increases.
The PMI is only required for the first 20% of your loan amount.
If you have a $200,000 loan and your home value increases to $220,000, you will no longer need to pay PMI if you refinance at this point.
Is PMI tax deductible?
Yes, you can claim a tax deduction for the amount you pay to PMI. You can also get a refund of your PMI premium if you cancel your PMI policy before it expires.
Where does the PMI money go?
The PMI fee goes toward insurance coverage that protects your lender in the event you default on your loan.