Private Mortgage Insurance (PMI) is a type of insurance that protects lenders in case borrowers default on their mortgage payments. It is generally required when a homebuyer puts down less than 20% of the home’s purchase price. PMI reduces the lender’s financial risk and makes it possible for more buyers to qualify for loans with smaller down payments. https://realestatejot.info/how-to-get-private-mortgage-insurance/
This article provides a step-by-step guide on how to get PMI, including when it’s needed, how to calculate the cost, and the best strategies to reduce or avoid PMI payments.
What Is Private Mortgage Insurance (PMI)?
PMI is a policy issued by private insurance companies that compensates the mortgage lender if the borrower fails to meet their payment obligations. It is often associated with conventional loans when borrowers put down less than 20% of the home’s purchase price.
While PMI is designed to protect the lender, it can benefit borrowers by enabling them to buy a home sooner without waiting to save for a larger down payment. However, borrowers need to factor PMI costs into their monthly budget since it increases the overall mortgage payment.
When Do You Need PMI?
PMI is usually required for the following types of loans:
- Conventional Loans with Low Down Payments: PMI is mandatory for borrowers who put down less than 20% on a conventional mortgage.
- Refinancing Without 20% Equity: If you refinance your home but don’t have at least 20% equity, your lender may require PMI.
- High Loan-to-Value (LTV) Ratio: If the LTV ratio exceeds 80%, lenders typically require PMI to minimize risk.
Steps to Get PMI
1. Assess Your Loan Type and Down Payment
The need for PMI depends primarily on the type of loan you choose and the amount of your down payment. Conventional loans typically require PMI if you put down less than 20%. Government-backed loans like FHA loans have their own form of mortgage insurance, which differs from PMI.
Tip: If your down payment is close to 20%, consider saving a bit more to avoid PMI.
2. Apply for a Mortgage with a Lender
To get PMI, you first need to apply for a mortgage. During the application process, the lender will assess your financial profile, credit score, debt-to-income (DTI) ratio, and loan-to-value (LTV) ratio. If your down payment is less than 20%, the lender will inform you that PMI is required.
How LTV Ratio Works:
- LTV Ratio = (Loan Amount / Home Value) × 100
For example, if you buy a home worth $300,000 and make a $30,000 down payment, your LTV ratio will be 90%, which means PMI will likely be required.
3. Choose a PMI Provider
Most lenders partner with private insurance companies that offer PMI. Once the lender approves your loan, they will typically arrange for PMI coverage with one of their affiliated providers. Common PMI providers in the U.S. include:
- MGIC (Mortgage Guaranty Insurance Corporation)
- Radian Group
- Essent Guaranty
- Genworth Financial
- National MI
The lender may automatically assign one of these providers to your loan, but you can ask about their options if you want to compare rates.
4. Determine the PMI Premium Structure
PMI premiums can be structured in different ways, and the cost depends on factors like your credit score, down payment, and loan term. Here are the most common ways PMI premiums are paid:
- Monthly Premiums: PMI is added to your monthly mortgage payment. This is the most common method and spreads the cost over the loan term.
- Upfront Premiums: You pay the full PMI premium upfront at closing. Some lenders offer the option to roll this cost into the loan.
- Hybrid (Upfront + Monthly): Some PMI providers allow borrowers to pay part of the premium upfront and the rest in monthly installments.
The lender will provide a breakdown of the PMI payment options during the loan approval process.
5. Calculate the Cost of PMI
The cost of PMI varies but is typically between 0.1% and 2% of the original loan amount per year, depending on several factors, including:
- Credit Score: Higher scores result in lower PMI rates.
- Down Payment Size: A larger down payment reduces PMI premiums.
- Loan Amount and Term: Longer loan terms may result in higher PMI costs.
- Debt-to-Income Ratio: A lower DTI ratio can reduce PMI costs.
Example PMI Calculation:
- Home Price: $300,000
- Down Payment: $15,000 (5%)
- Loan Amount: $285,000
- PMI Rate: 0.8% annually
PMI cost = 0.8% × $285,000 = $2,280 annually, or $190 per month.
6. Set Up PMI Payments with Your Lender
If you choose monthly PMI premiums, the lender will include them in your mortgage payment. This means your monthly payment will consist of:
- Principal and interest
- Property taxes
- Homeowners insurance
- PMI
The lender will collect the PMI premiums and forward them to the insurance provider.
How to Cancel PMI
PMI does not last for the entire loan term and can be canceled once specific conditions are met. Here’s how you can cancel PMI:
- Automatic Termination: PMI must be canceled automatically when your loan balance reaches 78% of the original home value, as long as you are current on payments.
- Request Cancellation at 80% LTV: You can request PMI cancellation once your loan-to-value ratio drops to 80%. This can occur through regular payments or if the home’s value increases due to market appreciation.
- Refinance the Mortgage: If your home value has risen significantly, refinancing to a new loan with a lower LTV ratio can eliminate the need for PMI.
- Make Extra Payments: Making extra principal payments helps reduce the loan balance faster, allowing you to cancel PMI sooner.
Important: PMI cannot be canceled for FHA loans unless you refinance into a conventional loan.
Strategies to Avoid PMI
If you want to avoid paying PMI, consider the following strategies:
1. Save for a Larger Down Payment
Putting down 20% or more eliminates the need for PMI altogether. If possible, wait to buy until you can save a larger down payment.
2. Piggyback Loans (80-10-10 Loan)
A piggyback loan involves taking out two loans—one for 80% of the home’s value and another for 10%, with the remaining 10% as your down payment. This strategy avoids PMI by keeping the primary loan at an 80% LTV ratio.
3. Look for Lender-Paid PMI (LPMI)
Some lenders offer to cover the PMI, but they usually charge a higher interest rate in return. This option can make sense if you plan to sell or refinance within a few years.
4. Use Government-Backed Loans
Loans backed by the VA (for veterans) or USDA (for rural areas) do not require PMI, even with low or no down payments.
Conclusion
Private Mortgage Insurance (PMI) makes it possible for homebuyers to secure a mortgage with a low down payment, but it comes with additional costs. Knowing how PMI works and how to get it can help you make informed decisions when buying a home. By choosing the right lender, comparing PMI providers, and calculating the costs, you can incorporate PMI into your budget effectively.
With careful planning and strategies like refinancing or making extra payments, you can cancel PMI and reduce your mortgage expenses over time. Alternatively, exploring ways to avoid PMI—such as saving for a larger down payment or using a piggyback loan—can help you achieve homeownership without the added cost.