What if you paid for something every month and didn’t even know what it was?
Many homeowners pay for private mortgage insurance (PMI) as part of their house payment. But few people understand what PMI is all about.
Wondering what PMI is and whether you can get rid of it entirely? Keep reading to discover the answer!
What Is Private Mortgage Insurance?
We’ve put together a complete guide to understanding private mortgage insurance. Before we go any further, it’s important to define exactly what PMI is.
PMI is a type of insurance required on most mortgages when the homeowner puts down less than 20% as a downpayment on the home. In those instances, PMI is required by your lender and can be paid in several different ways (see our notes below).
Many who have PMI are annoyed by it. After all, it’s effectively making you pay more for your home! But without PMI, many people would not be able to buy a home in the first place.
What Is the Purpose of PMI?
One common question is “what purpose does PMI serve?” Technically, PMI serves a different purpose to the lender and to the buyer.
To the lender, PMI is exactly what it says in the title: insurance. It protects the lender in cases where a homeowner ends up defaulting on their mortgage loan. It is not required when you put 20% (or more) down because the lender doesn’t think you’re at risk of defaulting.
For the buyer, the PMI is one of the only ways to buy a home without putting 20% down. If the majority of people had to put down $40,000+ just to buy a home, we would have a lot fewer homeowners!
Avoiding PMI On Future Mortgages
It’s very common to own more than one home in your lifetime. That’s why people sometimes refer to your first home as a “starter home.” How, then, can you avoid PMI on future mortgages?
The most direct answer is to put a downpayment of 20% or more on your next home. It may be easier to do this if you can make a profit from the sale of your old home.
You can also get an FHA loan for your next home. While that lets you avoid traditional PMI, you’ll be stuck with a mortgage insurance premium that you can’t get rid of (more on this later).
It’s also possible to find loans you like from the lender that do not require any PMI. Because that is up to the lender’s discretion, it never hurts to ask.
How Long Will You Pay for PMI?
Another obvious question is, “how long do I have to pay for PMI?” If you don’t know what your options are, you may end up paying it for longer than necessary.
Legally, the lender must automatically cancel your PMI after you have paid for at least 22% of the home’s value. In this sense, PMI will automatically go away on its own.
However, you can request for early PMI cancellation after you have paid a minimum of 20% or your home has increased in value enough that you have 20% in equity. This request can cost nothing and may help you save some money. Check with your servicing lender to see what they require in order to have your PMI removed.
As for how long it will be until you can make a request, it depends on how much money you put down, how much you are paying every month, and if/how much your home has increased in value since you purchased it.
Different Ways to Pay
Most homeowners who have PMI pay it every month. But there are actually several different ways to pay for your private mortgage insurance.
That first option is the “monthly premiums” option. It’s pretty straightforward: the annual cost of your annual PMI is split into 12 even payments and is included in your monthly mortgage payment.
The second option is “lender-paid mortgage insurance.” This is when you do not explicitly pay for a PMI. Instead, the lender adjusts your mortgage rate to compensate for PMI costs.
The third option is a “single premium.” This means that you pay one large sum at the time of closing that covers the PMI for the duration of the mortgage.
PMI Versus Mortgage Insurance Premium
It’s easy to confuse private mortgage insurance with a mortgage insurance premium (MIP). These are different, though each has some advantages and disadvantages.
Mortgage insurance is part of FHA loans. Those are loans that require a lower downpayment than a traditional mortgage. In fact, you can get an FHA loan for only 3.5% down.
What’s the catch? Simple: mortgage insurance is built into the FHA loan. It must be paid every month as part of the mortgage.
Unlike a PMI, mortgage insurance through an FHA loan cannot be directly canceled, no matter how much of the home’s value the owner has paid. The only real option after paying 20% or having 20% in equity is to refinance into a loan that has no PMI or MIP.
How to Cancel PMI?
We’ve already covered the simplest way to cancel PMI: pay at least 20% of the home’s value and then ask the lender to get rid of PMI.
While that remains the primary way to cancel mortgage insurance, there are a few ways to do it sooner. Each method is related to the fact that PMI only goes off of the initial appraised value of your home.
It’s possible to pay for a new appraisal and have the lender use the new value of the home to determine whether or not you still require PMI. While the new appraisal will cost a few hundred bucks, it may help you ditch the PMI.
You can also remodel your home to boost its value on the open market. This affects your loan-to-value ratio and may persuade the lender to get rid of PMI.
Finally, it’s possible to pay extra on your mortgage each month. Throwing in an extra $50 or $100 each month will get you to the 20% equity threshold that much sooner.
Ultimately, there are many ways to cancel PMI. We recommend that you find the method that’s best suited to your life and budget.
Private Mortgage Insurance: Your Next Moves
Now you know the full lowdown on private mortgage insurance. But do you know who can get you the best rates on your next home?
We specialize in helping residents find the Portland home of their dreams. To see what we can do to make your own dreams come true, contact us today!