All About Private Mortgage Insurance – PMI

What is PMI for Mortgage Loans?

PMI, or Private Mortgage Insurance, has been around in various forms for well over a century. It is a type of insurance that protects the mortgage lender in case the borrower defaults on a mortgage loan. PMI is typically required when a borrower makes a down payment of less than 20% of the home’s purchase price.

Here is how PMI works:

  • Why it is needed: If the down payment is smaller, the lender takes on more risk. PMI helps offset this risk by providing insurance coverage that compensates the lender if the borrower stops making payments.
  • Cost: The cost of PMI is usually added to the borrower’s monthly mortgage payment, though it can sometimes be paid upfront. PMI costs vary depending on the loan amount, down payment size, and credit score, typically ranging from 0.3% to 1.5% of the loan amount annually.
  • How long it lasts: Once the borrower has paid enough of the loan principal to reach 20% equity in the home, PMI can usually be canceled. However, this depends on the terms of the mortgage and whether the borrower requests the cancellation or waits for automatic removal when 22% equity is reached.

In short, PMI is a way to help borrowers get a mortgage with a lower down payment but adds extra cost until they build sufficient equity.

What Factors does my PMI Payment Depend on?

Your PMI payment depends on several key factors:

  • Loan Amount: The larger your mortgage loan, the higher your PMI payments will be. PMI is usually calculated as a percentage of the loan amount.
  • Down Payment Size or Loan-to-Value Ratio (LTV): The LTV is the percentage of the home’s value that you are borrowing. A higher LTV (when you borrow more relative to the home’s value) results in higher PMI costs. In other words, the smaller your down payment, the higher your PMI costs.
  • Credit Score: Your credit score plays a significant role in determining your PMI rate. A higher credit score generally results in a lower PMI premium, while a lower credit score increases the cost.
  • Type of Loan: Certain loan types or structures may influence PMI costs. For example, FHA loans have their own mortgage insurance requirements, while conventional loans offer more flexibility in terms of PMI cancellation once you reach 20% equity.
  • Length of Loan Term: The term of your mortgage (e.g., 15 years vs. 30 years) can also affect PMI rates. Shorter-term loans often have lower PMI costs.
  • Occupancy: Whether the home is your primary residence, a second home, or an investment property can affect your PMI. PMI tends to be higher for non-owner-occupied homes.

pmi for mortgage

Can I Shop for my Own PMI?

No, you typically cannot shop for your own PMI. The lender usually selects the private mortgage insurance provider when you take out a mortgage, and the cost of the PMI is set based on the lender’s agreement with the insurer.

However, you can still influence the PMI cost in the following ways:

  • Improve Your Credit Score: A better credit score can lower your PMI premiums, as rates are partly based on your creditworthiness.
  • Larger Down Payment: The more money you put down, the lower your PMI costs will be, and if you can reach 20% down, you can avoid PMI altogether.
  • Compare Lenders: Different lenders might have different PMI providers and rates. Shopping around for different mortgage lenders could indirectly affect the cost of PMI.

When does PMI go Away?

PMI is automatically canceled when your loan balance reaches 78% of the original purchase price of your home, which means you have 22% equity. This happens if you are up to date on your mortgage payments.

what is pmi for mortgage

Can I Request PMI Cancellation?

You can request the lender to cancel PMI when your loan balance reaches 80% of the home’s original value. To do this, you usually need to submit a formal request and may need a home appraisal to confirm that the home’s value has not dropped.

If your home has appreciated in value, you may be able to refinance your mortgage to get rid of PMI sooner by having enough equity (usually 20% or more) in the home. Be mindful of interest rates and closing costs – these numbers have to make sense.

You can also expedite PMI cancellation by making extra payments: By paying more than your required monthly payment, you can reduce your loan balance faster. This helps you reach 20% equity in your home sooner, allowing you to request PMI removal.

Is PMI tax Deductible?

Unfortunately, as of 2021, the itemized deduction for mortgage insurance premiums has expired. Prior to that PMI was deductible based on your income as an itemized deduction – meaning that you had to use Schedule A instead of taking the standard deduction. To ensure that you are not missing any benefits, check for any changes in tax laws or consult your accounting professional before filing your income tax returns.

Bottom Line

Unfortunately, unless you have a 20% down payment, PMI is not something that can be avoided. With time, however, PMI can be lowered and/or cancelled. Please reach out to me to discuss your PMI mitigating options at 312-296-4175 or email me at connect@borislending.com. I lend in all 50 states and I am never too busy for your referrals!