What you need to know about private mortgage insurance

stack of money house pen

You'll be required to carry private mortgage insurance if you don't have enough cash to make a 20% down payment on a home.

It costs anywhere from 0.20% to 1.50% of the balance on your loan each year, based on your credit score, down payment and loan term.

The annual cost is divided into 12 monthly premiums and added to your monthly mortgage payment.

Mortgage insurance protects the lender, not you. If you fail to make the payments and must be foreclosed on, the mortgage insurer will cover a percentage of the lender's loss.

That's why your mortgage servicer will insist that you continue that coverage until you've paid down the balance and the property's appreciated enough for you to have 20% to 25% equity in the home.

That means the balance on the mortgage has been reduced to at least 80% of the property's current market value.

Which homebuyers need PMI

Lenders know that borrowers are far less likely to default and create a major loss for the mortgage holder when they have a significant financial stake in the property.

It's not an uncommon requirement, because many homebuyers, especially first-time buyers, don't have the cash required for a 20% down payment.

Somewhere around 1 in 2 borrowers take out loans that require PMI.

Which home buyers needed PMI?

Range put down % who needed PMI
Less than 5% to 20% down 51%
20% 24%
More than 20% 234%

Source: 2016 TD Bank Mortgage Service Index

The majority of those loans were made with down payments of 5% to 20%.

You'll often hear bankers or real estate agents refer to the loan-to-value ratio. That's the amount you're borrowing divided by the property's market value.

If, for example, you make the absolute minimum down payment of 3%, then you'll move in with 3% equity and your loan-to-value ratio will be 97%.

The minimum down payment is among the many rules set by the two government-controlled companies, Fannie Mae and Freddie Mac, that buy the great majority of mortgages.

Lenders who want to sell their loans to Fannie and Freddie must ensure that every loan meets or conforms to their minimum standards, which is where the term "conforming loans" comes from.

Types of loans

A conforming loan, or conventional loan as they're sometimes called, is not directly guaranteed by a federal agency.

That's what sets it apart from loans backed by the Federal Housing Administration and Department of Veterans Affairs.

Borrowers who can qualify for a VA loan can make no down payment and not be required to pay any form of mortgage insurance.

That's just one of the reasons we think VA loans are the best way to finance a home and encourage anyone who's eligible to consider them.

How much house can you afford?

This is the first thing you need to decide before you even begin to hunt for a new place to live. No one wants to be house-poor, saddled with mortgage payments that gobble up too much of their paycheck. Follow these 5 smart moves, and you'll find the price range that fits your budget.

Homebuyers with below-average credit scores who can't qualify for a conforming loan can turn to FHA mortgages.

Financing is available for buyers with as little as 3.5% down, and in 2015, the government reduced the annual FHA mortgage insurance premiums from 1.35% to 0.85% of the outstanding balance.

Unfortunately, the Federal Housing Administration also requires a substantial up-front premium (1.75% of the amount you're borrowing) that private mortgage insurance, or PMI, does not.

Most homebuyers using FHA-backed loans roll that premium into the amount they're financing, which pushes their principal and interest payments up by $8 to $10 a month for every $100,000 they're borrowing.

You'll also have to keep paying the annual premiums for the life of the loan. Unlike private mortgage insurance on conforming loans, you can't drop FHA mortgage insurance when your equity reaches 20% or 25%.

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Private mortgage insurance

As a result, most borrowers will spend less with a conforming loan and PMI than with an FHA loan and FHA mortgage insurance.

But it never hurts to ask your lender to run the numbers for you and make sure.

The more you borrow and the lower your credit score, the higher your monthly PMI premium will be. The closer you get to 20% down and excellent credit, the lower the monthly PMI.

You'll see some examples for a borrower with a credit score between 720 and 759 in the chart below. These numbers should be near universal, as all PMI companies typically charge the same or similar rates, which they update about once a year based on changes in borrower default rates.

How Much Would You Pay?

Loan-to-Value 30-year fixed 15-year fixed Monthly payment
90.01% to 95% PMI 0.62% of loan PMI 0.57% of loan $52/$48 per $100,000 borrowed
85.01% to 90% PMI 0.44% of loan PMI 0.39% of loan $37/$33 per $100,000 borrowed
85% and under PMI 0.27% of loan PMI 0.22% of loan $23/$18 per $100,000 borrowed

Once you've committed to paying PMI, you'll usually have to keep it for at least two years.

If your home has appreciated enough to give you 25% equity after two to five years, you can cancel the coverage. After five years, you just need 20% equity to ditch it.

In either scenario, you'll need an appraisal, ordered directly by your lender, to substantiate your home's value.

The federal Homeowners Protection Act requires lenders to cancel PMI automatically when you've reduced your balance to 78% of your home's purchase price, even if its market value has declined since then. (This rule doesn't apply if your loan was designated "high risk" when you took it out.)

With 10% down and a 30-year mortgage, it takes about seven years to reach that point if you only make the minimum monthly payments. One of the documents you received at closing should provide the exact date for your loan.

You should also receive an annual notice reminding you that you have PMI and that you have a right to request cancellation under certain conditions.

One thing to keep in mind: If you have a second mortgage, such as a home equity loan or home equity line of credit, that reduces your equity.

Say your home is worth $200,000, and you owe $140,000 on your first mortgage. That gives you 30% equity, or $60,000.

But if you had a second mortgage for $30,000, your equity would drop to 15%, making you ineligible to cancel PMI.

PMI has been tax-deductible since 2007 and, by an extension voted by Congress, it also is in 2017.

That deduction is one of a few dozen tax provisions that keeps expiring each year and getting extended for one more year at the last second. Don't ever count on it, but consider it a bonus if you end up being able to claim it.

Private mortgage insurance is only tax-deductible if you took out your loan in 2007 or later and you itemize your deductions using Schedule A.

The deduction phases out when your household's adjusted gross income — that's your income before any deductions — reaches $100,000, whether you're married filing jointly or single. At $109,000, you can't claim the deduction at all.

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  • dnmjnz

    Scenario: Credit scores are 749,724 and 735. Income $160k.
    A home sells for 285k. I put a down a payment of $15k...and mortgage $270k. It appraises for $349k. That's about 78% OF LOAN or 22.5% equity.
    QUESTION: If the loan is conventional, should i have a PMI according to the scenario explained above?

    • Tobith

      Of course every contract may be different, but my PMI disclosure says that PMI can be canceled when the the principal balance is 80% of the "original value" of the property. It then defines "original value" as the LESSER of the sales price or the appraised value of the property when the loan is closed. So if that definition applies when obtaining the loan, I would say you still will have to get PMI based on the fact that the sales price is much lower than the appraisal price.

    • Lindsayp

      You will have PMI when you close since the home's value in regards to determining the LTV is always based on the purchase price, not the appraised value. However, you can wait two years and get an updated appraisal through your lender and it will be dropped if you have 25% equity. Or, you can refi now and drop the PMI since at that point the home's value will be based on the appraised value, not the purchase price. Keep in mind that you will accrue closing costs if you refi that may outweigh the amount you will spend paying PMI for 2 years.

  • MJ

    We recently purchased and we got socked for an obscene $365 per month for PMI on a $183,100 mortgage. The mortgage insurance company cited that, though our median FICO was 720 (it is higher now), that, because we declared bankruptcy in 2008 and our lender did not reaffirm the loan, that we were higher risk. It didn't seem to matter to them that we continued to pay the mortgage on time for those eight years, used the equity from the sale of the non-reaffirmed mortgaged house for the down payment on the next house, and that it wasn't our choice that the mortgage was not reaffirmed. We even over-qualify for the loan by income and debt ratio.

    Were we taken advantage of? If so, is there any recourse? If the loan was considered "high risk," does that mean that we will have trouble getting rid of it? We received disclosure that the PMI would automatically fall off after 7-1/2 years, but it is suggested above that they can deny that. We have an excellent rate because of our credit (less than 4% on a 30-year fixed) so refinancing might not help us unless the rates stay low. Please help!

  • Marcella BlueHorseWY

    If one defaults on a mortgage for which there is PMI, how does one go about finding out the carrier of the PMI and making a claim? I know the mortgagor probably makes the claim, but do I have any opportunity to participate in that process?

  • All4OneandOne4All

    Article is dated Jan 17th, 2017
    Comments are a year old.

    As homes are foreclosed in the aftermath of the bailouts precipitated by the "Financial Crisis," do we get an accounting of what the lenders are receiving from all the mortgage insurance policies ? Seems to me that no one should be foreclosed if there was a mortgage insurance policy in place.

  • David Ginsburg

    PMI can sometimes be removed based on numerous scenarios. Read about the copyrighted PMI Terminator (tm) personalized printout that takes into account your home's value, age of loan and about ten other factors. It's offered by Loantech, the nation's oldest mortgage audit firm. Not a lender. Check it out.

  • Michael J

    That is correct, if you wish to have PMI removed before the scheduled 78% LTV you will need to have an appraisal done showing more than 20% equity in the home.This is standard with most lenders; however, lowering the PMI down to .2% is great and I don't think they're required to do this.

    • Eric Holmes

      After 10 years of paying the INITIAL PMI premium of .96%, the rate automatically drops down to a previously documented figure (in this case .20%). Chase isn't doing you any favors, they are only following the guidelines laid out in the original loan agreement. You'd be smart to contact them and ask for the steps needed to drop your PMI altogether, which is likely to be 1) pay upfront for an appraisal that will likely be more than the cost of a "normal" appraisal from another lender, 2) they will order the appraisal and 3) determine if you now have 20% + equity so you can drop the PMI for good.

  • Jason Zonnevylle

    My loan is with Ditech and they want $4,000 - $5,000 for an appraisal to even see if they can drop my PMI. That's more than just paying it the remaining 3 years! I feel like they have been mugging me for years now. What can I do?

    • shipdog7

      I just had an appraisal today costing me $450. My son had one not long ago and he paid $350. I am in Michigan and refinancing through AimLoan.

    • Eric Holmes

      $400 to $500 is more reasonable. They can only charge you the actual cost of the appraisal and there's not a residential appraiser in the country that charges that much. I think you were misquoted or given bad information.

  • David Ginsburg

    Sounds like the lender made a mistake, which is not that unusual. Check out Loantech's PMI Terminator (tm) personalized report which spells out all your options for getting rid of PMI. We've reviewed thousands of mortgages over the past 30 years.

  • https://www.ovlg.com/ Amy Nickson

    Mortgage terms and insurance is quite difficult to understand. I thank to my mom for giving me a home. However, this article is full of information.