What Is PMI?
Private mortgage insurance, or PMI, is insurance that protects the lender in the event that the borrower defaults on their home loan. Mortgage lenders require PMI when the borrower makes a down payment of less than 20 percent of the home’s purchase price, as it helps to protect the lender from losses.
Borrowers with good credit can typically expect to pay around 0.5 percent of their loan amount in PMI premiums each year. However, borrowers with poor credit may have to pay as much as three percent.
Once the borrower has built up enough equity in their home (usually 22 percent), they can request that the lender cancel their PMI policy. In order to avoid paying PMI, many borrowers choose to make a down payment of 20 percent or more when they purchase their home.
Three payment options for PMI:
Monthly PMI is added to the borrower’s regular mortgage payment and can be paid as part of an escrow account. The advantage of this option is that it can be spread out over time, making it easier to budget for. The downside is that it will likely increase the overall cost of the loan.
Lump Sum or Single Payment PMI:
This can be done at closing or at some point during the life of the mortgage loan. The advantage of this option is that it can save money in the long run. However, it requires a large upfront payment.
Lender Paid PMI:
With this option, the lender pays for the PMI and then charges a higher interest rate on the loan. This can be a good option for borrowers who are unable to make a large down payment but it will likely increase the overall cost of the loan.
How to avoid Private Mortgage Insurance?
If you have private mortgage insurance (PMI), you’re probably paying for it as part of your monthly mortgage payment. Most people who have PMI are required to have it by their lender, but you may be able to get rid of it sooner than you think. Here are a few ways to get rid of PMI:
1) Make sure your monthly payments are up to date
The first step is to make sure all of your monthly mortgage payments have been made on time and in full. Lenders typically won’t allow you to cancel PMI until you’ve demonstrated a good payment history.
2) Reach 20% equity in your home
Once you’ve built up enough equity in your home, you can request that your lender cancel your PMI. This is typically when the value of your home has increased and your loan balance has decreased to 80% or less of the original value of the home.
3) Get a new appraisal.
If your home has gone up in value, you can request a new appraisal from your lender. If the appraisal shows that your home is worth more than what you owe on your mortgage, you may be able to cancel your PMI.
Refinance is the process of taking out a new mortgage to pay off an existing mortgage. If you have private mortgage insurance, you may be able to cancel it when you refinance. Mortgage insurance is required on all conventional loans with less than a 20% down payment.
The good news is that once your home equity reaches 20%, you can request that your lender cancel your PMI. You’ll need to have a good credit score and demonstrate proof of income to qualify for a refinance.
5) Lender Paid Mortgage Insurance
Lender Paid Mortgage Insurance (LPMI) is insurance that a lender purchases to cover the borrower in the event of default. The monthly premium is included in the mortgage payment. If the borrower ever defaults on the loan, the lender is protected against loss. LPMI is usually only available on conventional loans with a down payment of less than 20%.
LPMI and PMI are both forms of mortgage insurance, but they work differently. With LPMI, the lender pays for the insurance and includes the cost in the mortgage payment.
With PMI, the borrower pays for the insurance and it is often added to the mortgage payment. LPMI may be a good option for borrowers who do not want to pay for PMI or who do not have enough money for a 20% down payment.
Talk to your lender about these options and see if any are right for you. With a little bit of effort, you will find a way through which you don’t have to pay mortgage insurance and can save yourself some money every month.
Up-front Mortgage Insurance Premium:
The Up-front Mortgage Insurance Premium (UFMIP) is a fee that’s charged to borrowers of Federal Housing Administration (FHA) loans. The premium is paid when the loan is first originated, and it helps to ensure the loan in case the borrower defaults.
The UFMIP is 1.75% of the loan amount, and it can be added to the loan balance or paid in cash at closing. FHA loan is available to borrowers with less-than-perfect credit, and it can be a good option for first-time homebuyers. However, borrowers should be aware that they’ll need to pay the UFMIP before they can begin to build equity in their homes.
Monthly Mortgage Insurance Premium:
Home buyers who obtain a mortgage from a lending institution are typically required to pay for monthly mortgage insurance. The amount of the premium is based on the loan amount, the loan-to-value ratio, and the borrower’s credit score.
Mortgage insurance protects the lender in case the borrower defaults on the loan. For borrowers, mortgage insurance provides peace of mind in knowing that their lender is protected. It also allows them to obtain a loan with a lower down payment than would otherwise be required.
Who pays for PMI?
Unlike homeowners insurance, which is typically paid by the borrower as part of their monthly mortgage payment, private mortgage insurance (PMI) is paid by the lender. This is because PMI is designed to protect the lender’s investment in case the borrower defaults on their loan. As a result, the cost of PMI is typically passed on to the borrower in the form of higher interest rates.