What is PMI, Private Mortgage Insurance?

Mortgage insurance is an insurance policy which protects the lender who issues your mortgage. This policy reduces the risk they take in funding mortgage loans to buyers or refinancers with less than 20% equity in their home. So, while there are some great mortgage options to people with 5% – 19.99% down payment to achieve homeownership, mortgage insurance is an important topic to understand so that you are aware of what your options are, how it is paid for, and what you can do to eliminate it down the line.

It is important to note that having mortgage insurance does increase the monthly payment. This is a very important factor to remember when you are qualifying for a mortgage as it materially changes your monthly expense total, and therefore your maximum qualification amount.

How is it charged? The 2 most common ways are “borrower paid mortgage insurance” and “lender paid mortgage insurance”. (**There are others however they are not as widely available and rarely used in the majority of today’s financing options)

Borrower paid mortgage insurance is an additional monthly fee you pay alongside your mortgage payment. This is essentially a monthly policy premium payment for the insurance policy the lender has against the risk of default of your loan. This results in an overall higher monthly out of pocket expense but allows buyers with less than 20% down payment to purchase a home and homeowners with less than 20% equity to still refinance to better their financial situation.

Lender paid mortgage insurance is when the lender who funds your loan technically pays the policy monthly policy premium, but to do so they charge you a higher interest rate. In short, your increased interest rate accounts for the amount of money the lender needs additionally monthly to cover the cost of their insurance against your risk of default.

The cost of monthly mortgage insurance varies on a number of factors:

• The type of mortgage insurance you select or qualify for.
• The length of your mortgage term (15 / 20 / 30 year term)
• The down payment amount (%) / Loan to Value Ratio. More down payment results in less costly mortgage insurance coverage. Less down payment results in more costly mortgage insurance coverage.
• Credit score(s) of the borrower or borrowers
• Loan amount. Whether you have a conforming loan vs. a Jumbo or “High Balance” loan amount can change the cost of monthly mortgage insurance.
• Loan Type. If you are financing a conventional vs. a FHA, monthly mortgage insurance can carry different costs.

In short, the riskier the financing is for the lender the more costly the monthly mortgage insurance will be, and vice versa.

Removing your mortgage insurance.

Although private mortgage insurance may be a part of your financing when you obtain your loan, it does not always need to be a feature of your ongoing homeownership. Depending on the type of mortgage insurance you have, type of loan, and loan to value, there are a variety of conditions that can result in the removal of your monthly mortgage insurance premium.

If you have borrower paid mortgage insurance, the policy can be terminated when you have maintained on time monthly payments, and you have 22% or more equity in your home. In some cases it is as easy as calling up your mortgage servicer and requesting the mortgage insurance be removed. There will be a process to formally request that, submit for the removal, and obtain their termination of the policy; however, these are simple steps to take in order to save hundreds of dollars a month out of pocket.

If you have lender paid mortgage insurance and the policy is covered by having a higher interest rate, your only real option is to refinance out of that loan and into a new loan without mortgage insurance. One tangible way to do this is when the market values in your area have shot up in a relatively short period of time, whether that be a few months or even just a year or 2. During times like these, home price appreciation is your friend because it can easily help you surpass the 20% equity mark even without you having paid down a significant portion of your original loan balance. Going through a rate & term or cash out refinance allows you to pay off the loan with mortgage insurance, and obtain a new loan free from that additional monthly expense. Lastly, this is a regular outcome for homeowners who may not have had 20% down payment at the time of purchase, but maybe had 10-15% at that time. They more quickly get to the 20% threshold by a function of making on time monthly payments while the market also appreciates, thus achieving refinance-ability very early on in the duration of total homeownership. It’s almost like the market ends up covering the initial mortgage insurance on it’s own.

In summary, mortgage insurance costs borrowers’ money and protects the lender, but enables aspiring homeowners to get into the housing market with less than 20% down. Costs will vary based on a number of factors as discussed. In the end most people find it manageable when it’s within their spending means for qualifying, and more importantly, their monthly spending budget. With options to cancel or refinance to remove mortgage insurance, it can certainly be worth the price to get that home of your dreams.

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Rates & Fees Disclosure:
^‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.

^‡ Based on Mortgage Heroes internal data.