What is PMI? A guide to private mortgage insurance
Senior Content Writer
Quick insights
- Private mortgage insurance (PMI) is typically required when you put less than 20% down on a conventional loan.
- PMI adds an extra cost to your monthly bill. However, it may let you buy a home sooner because you need less cash up front.
- PMI protects the lender, not you, and it’s usually removed once you own 20% of your home’s value.
When you take out a conventional home loan, your lender may require you to pay PMI on the mortgage. Think of this extra monthly cost as a sort of tradeoff for buying a home while putting less than 20% down. Let’s review this protection for mortgage lenders in more detail, including various types and how the premium is generally calculated.
What is PMI?
PMI is a type of insurance that lenders normally require for conventional mortgages with a high loan-to-value ratio (LTV) (more than 80%), which translates to putting 20% or less down on the loan. Lenders accept some level of risk with these mortgages, and PMI helps to lower that risk.
Although you (the borrower) pay for PMI, this insurance isn’t actually for you. It protects the lender. If you default on your mortgage, PMI helps to pay part of the remaining loan balance back to the lender. However, PMI can offer potential benefits, too—mainly, helping a borrower qualify for a conventional loan with a down payment below 20%.
Types of PMI
Each type of PMI has its own payment structure and set of considerations. Here are three main types you might encounter:
- Borrower-paid PMI (BPMI): Another name for your standard mortgage insurance, BPMI is paid as part of your monthly mortgage payment until you reach 20% equity in your home.
- Lender-paid PMI (LPMI): With LPMI, your lender covers PMI costs. In exchange, you typically pay a higher interest rate on the mortgage itself.
- Single-premium PMI: This type of mortgage insurance involves paying a one-time, upfront premium at closing. You may be able to roll the costs of single-premium PMI into the loan itself.
MIP/PMI vs. homeowner’s insurance
Mortgage insurance premium (MIP) / Private Mortgage Insurance (PMI) and homeowner’s insurance are big parts of homeownership, but they serve different purposes, and you may not need both. Here’s a breakdown of the key differences.
- Purpose:
- MIP/PMI: Protects the mortgage lender.
- Homeowner’s insurance: Protects the homeowner.
- Coverage:
- MIP/PMI: Covers a portion of the lender’s loss if the borrower defaults on the loan.
- Homeowner’s insurance: Covers most financial losses due to damage to the property, theft, personal liability and other covered perils.
- Requirement:
- MIP/PMI: MIP is required for all FHA loans, while PMI is required for conventional loans with a down payment less than 20%.
- Homeowner’s insurance: Generally required by lenders and highly encouraged even after the loan is paid in full.
- Cost:
- MIP/PMI: Depends on down payment, loan amount and borrower credit score.
- Homeowner’s insurance: Depends on home value, location, coverage limits, deductible and claim history.
- Providers:
- MIP/PMI: FHA provides MIP while lenders arrange PMI with their provider of choice.
- Homeowner’s insurance: Homeowners can choose their provider.
When is PMI required?
PMI is typically required in two common scenarios:
- Your down payment is less than 20%: You can calculate your down payment percentage by dividing the amount you plan to put down by either the appraised value or the purchase price of the home (whichever is less). If you don’t put down at least 20%, you may have to pay for PMI.
- For refinance loans, your loan-to-value ratio is over 80%: If you’re refinancing your current mortgage, most conventional lenders require an LTV ratio less than 80% to avoid having to pay for PMI. You can calculate your LTV ratio by dividing your new mortgage amount by the appraised value of your home. If your LTV is over 80%, you may need PMI.
How much is PMI?
PMI costs are generally a small percentage of your mortgage. How much you pay depends on several factors:
- Your total loan amount: PMI expenses are generally higher for larger mortgages, since they represent a percentage of your total mortgage.
- Your credit score: Lenders typically charge borrowers with higher credit scores lower PMI percentages, as these borrowers are seen to be lower-risk.
- LTV ratio: Higher LTV ratios can result in higher PMI costs since lenders typically prefer a ratio of 80% or lower.
- Down payment: Smaller down payments often lead to higher PMI rates since it’ll take longer for you to reach 20% equity.
Lenders typically maintain charts that show the PMI percentage to charge in various situations. You can ask your lender for a specific percentage to make your calculations easier.
How is PMI calculated?
To calculate your PMI, ask your lender for your PMI percentage or range. Then, follow these steps:
- Identify the property value: You can get the exact figure from a recent appraisal or use an estimate of how much you plan to offer for the house.
- Find the total loan amount: To estimate your PMI for a refinance, start with your current mortgage balance. For a new mortgage, subtract your down payment from the home price.
- Calculate the LTV: Divide the loan amount by the property value. Then multiply by 100 to get the percentage. If the result is 80% or lower, you likely don’t have to pay PMI. If it’s higher than 80%, move on to the next step.
- Estimate your annual PMI premium: Take the PMI percentage your lender provided and multiply it by the total loan amount. The result is your annual premium. To estimate your monthly premium, divide the result by 12.
For more accurate results, speak with a home lending advisor for more specific information and personalized guidance.
When do you pay PMI?
There are a few ways to handle PMI payments. Some lenders may let you choose a payment method. Others may require you to agree to a specific option. The most common PMI payment methods include:
- Monthly premium: Paying a monthly premium is one of the more common PMI options. In this case, your lender automatically adds PMI to your monthly mortgage payment. You won’t have to make a large upfront payment, but your monthly payments will be higher.
- Upfront premium: Rather than paying every month, you may have the option to pay the full cost at once. This is single-premium PMI. In this case, your lender arranges for you to pay PMI when you close on the loan. While it’s an additional closing cost, your monthly mortgage payment will be lower.
- Monthly and upfront premiums: Alternatively, your PMI might come in a combination of the two methods above. In this case, your lender arranges for you to pay a portion of your PMI at closing and adds the rest to your monthly mortgage payments.
Can you reduce or eliminate PMI?
You can usually get rid of PMI once your loan balance falls below 80% of your home’s value (exact requirements vary by lender). When you reach this milestone, you can ask your lender to cancel the insurance. PMI may be removable once you reach a required equity level, but exact rules vary by lender, loan program and investor. However, you may cancel it sooner if you meet certain criteria. For example, some Chase-owned mortgages may be eligible for early PMI cancellation if the LTV ratio is 80% or lower, the home is owner-occupied and the property is a single-family home, condominium or other eligible property type, among other criteria.
When requesting PMI cancellation, you may need to cover the cost of an appraisal to verify your home’s current market value.
How to avoid paying PMI
You may be able to pay PMI premiums for less time or avoid PMI altogether. Here are some scenarios.
Make a down payment of 20% or more
When you’re planning to buy a house, review your savings to calculate the maximum down payment you can afford. If you can put down at least 20% of the home price, you can avoid paying PMI. Some homebuyers may prioritize homes on which they can afford a 20% down payment.
Pay down your current mortgage balance
If you’re planning to refinance your home but the current LTV is over 80%, consider paying off more of your mortgage balance first. If your mortgage servicer doesn’t penalize you for prepayments, you can consider paying off more of your mortgage right away. Otherwise, you may have to wait until you’ve made a few more monthly payments.
PMI pros and cons
Private mortgage insurance has its own potential advantages, such as enabling borrowers to enter the homebuying market earlier, as well as some potential downsides, including the additional PMI costs. Let’s take a closer look at some pros and cons of PMI:
PMI pros
- Helps enable homebuying: PMI helps borrowers purchase a home without a 20% down payment, a potentially significant financial hurdle for some homebuyers.
- Increased loan eligibility: By helping to mitigate risk, PMI can potentially help borrowers qualify for a conventional loan they may not otherwise be eligible for.
PMI cons
- Added monthly costs: PMI costs add to the monthly mortgage payment, increasing the overall cost of homeownership.
- Lender protection only: PMI protects the lender, not the borrower, in case of default.
In summary
What is PMI? Simply put, it’s insurance that manages the risk of lending to borrowers with higher LTV ratios. Mortgage PMI can increase your monthly housing costs, but may also help you buy a home sooner with a smaller down payment. There are a few types of PMI, and the cost varies based on factors like your loan amount, credit score, LTV ratio and total down payment.
As you build equity over time, you may have options to reduce or remove PMI, depending on your loan and lender requirements. If you’re curious to learn more about PMI, whether it’s worth it for you and how to potentially avoid it, consider speaking with a Home Lending Advisor.
What is PMI FAQs
1. Is PMI tax-deductible?
PMI’s tax deductibility can vary based on current tax laws. Eligibility may depend on factors such as your income and the date of your mortgage. To determine if you can deduct PMI on your taxes, check the latest IRS guidelines or consult with a qualified tax professional.
2. Do all loans require PMI?
Some government loan programs have different costs. For example, FHA loans use mortgage insurance premiums (MIP). VA loans typically don’t require monthly mortgage insurance but may include a VA funding fee or other program costs.
3. Do FHA loans have PMI?
FHA loans require a form of mortgage insurance called a mortgage insurance premium (MIP). Borrowers generally pay an upfront MIP (UFMIP) at closing and an annual MIP divided into monthly installments and included in the mortgage payments.
4. Should I pay off my PMI early?
You cannot allocate funds directly to your PMI costs. To pay off PMI early, you would technically be paying down your mortgage to have PMI removed. You would need to make extra payments towards your mortgage principal to reach 20% equity or your lender’s requirement. At a certain LTV, your PMI may be canceled automatically, or you can request to have PMI removed.
5. Who provides PMI?
As the buyer, you don’t choose your PMI provider. Your lender would set up the payment and coverage, connecting the PMI directly to your loan. That means you don’t have to worry about remembering an extra payment or providing proof of PMI. Instead, your lender charges you for PMI automatically as part of your mortgage payment.
6. Is it worth it to pay PMI?
Paying PMI may be worthwhile if it allows you to buy a home now instead of waiting to save a 20% down payment. While PMI adds to your monthly bill, buying sooner means your home can start growing in value right away. You can speak with a Home Lending Advisor to get advice tailored to your specific finances.
