What is private mortgage insurance (PMI)?
If you’re looking to buy a home with less than a 20% down payment, this is information you need to know.
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One of the biggest barriers to buying a home can be the down payment. That’s because lenders like to see at least 20% of the home’s purchase price. If you can’t meet that threshold, you may be required to buy private mortgage insurance (PMI).
PMI applies to what’s called “conventional conforming loans,” the most common type of mortgages. They are made by private lenders and meet criteria set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that back mortgages.
PMI is designed to protect lenders against losses if borrowers stop making payments. And it can help you qualify for a loan you might not otherwise get.
How much does PMI cost and how is it paid?
The amount of your monthly PMI payment depends on your credit score and down payment, but generally it ranges between 0.3% and 2% of the original loan amount each year. That cost is on top of your mortgage interest.
In most cases, PMI is added to your mortgage payments. You may also be able to pay it upfront at closing. Occasionally, you’ll be required to pay both an upfront and monthly premium. It depends on the lender and type of loan.
Quick tip
Your PMI premium appears in your loan estimate and closing disclosure document. It may also be a line item in your monthly mortgage statement.
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How to avoid PMI
The best way to avoid PMI is to make a down payment of at least 20% of the home’s purchase price. If you don’t have a big down payment, ask your lender about options. You might be eligible for a no-PMI loan.
Homebuyers with limited cash for a down payment or a less-than-sterling credit score or who are veterans might qualify for mortgages backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs.
What's loan-to-value ratio and how does it affect PMI?
Loan-to-value ratio (LTV) is the measure lenders use to determine whether you need to have PMI. It’s based on how much you owe on your mortgage and your home’s value—either the sale price or the appraised value at the time of purchase, whichever is less.
Mortgage balance
home’s value
100
Loan-to-value ratio
Lenders are looking for an LTV of 80%, which is what you achieve with a 20% down payment. The smaller your down payment, the higher your LTV ratio.
When does the PMI requirement end?
As long as your payments are current, your loan servicer may cancel PMI when your loan-to-value ratio reaches the 78% scheduled date based on the original value of your home. If you want to stop paying it before then, you can request in writing that PMI be canceled when your LTV falls below 80%. Just be aware that you may be required to pay for a new property valuation to ensure that the home’s value hasn’t fallen below its original value. Always refer to your Mortgage Insurance Disclosure for details on how to remove.
How does a home equity loan or line of credit affect PMI?
If you are considering a home equity loan or line of credit, an important calculation is your combined LTV, which compares the value of your home to the combined total of the loans secured by it. Adding home equity debt to the calculation increases your LTV and could require you to carry PMI for a longer period of time.
