Private mortgage insurance, or PMI, is a type of mortgage insurance that may be required on a conventional loan when your down payment is below a certain percentage. It protects the lender if you stop making payments. Understanding what PMI is on a mortgage helps you plan your down payment and your monthly payment.
The short answer: PMI may be required on a conventional loan when you put less than 20 percent down. It is added to your monthly payment and, depending on your loan, may be cancelled when you reach a certain equity point. It is different from the mortgage insurance on an FHA home loan.
What is PMI?
PMI is insurance that protects your lender, not you. If you stop making payments and the loan goes into default, the insurance helps cover the lender's loss. PMI is typically required on conventional loans when your loan-to-value ratio is above 80 percent, which means your down payment is less than 20 percent.
When is PMI required?
PMI is usually required on a conventional loan when your loan-to-value ratio is above 80 percent, which means your down payment is less than 20 percent. The exact requirement depends on your loan program and the lender.
Some loan programs, such as VA home loans for eligible borrowers, may not require monthly mortgage insurance. FHA loans have their own mortgage insurance, which works differently from PMI.
How much does PMI cost?
The cost of PMI depends on several factors:
- Your down payment amount
- Your loan amount
- Your credit score
- Your loan type
PMI is usually part of your monthly mortgage payment, and it may also include an upfront premium at closing in some cases. Ask your lender for an estimate based on your situation.
How PMI differs from FHA mortgage insurance
PMI is private mortgage insurance on conventional loans. FHA mortgage insurance is part of the FHA loan program and typically includes an upfront premium and an annual premium. The rules for when each can be cancelled are different:
- PMI (conventional): may be cancelled when you reach a certain equity point, depending on your loan.
- FHA mortgage insurance: the cancellation rules depend on the loan, when it was originated and your loan-to-value ratio.
Ask your loan officer how mortgage insurance applies to each program and when it can be cancelled.
When can you cancel PMI?
For conventional loans, PMI may be cancelled when your loan-to-value ratio reaches a certain point. There are two common ways:
- Automatic cancellation: your lender may be required to cancel PMI automatically when you reach a certain point based on the original payment schedule.
- Request-based cancellation: you may be able to request cancellation sooner if your home's value has increased or you have made extra payments, often with a new appraisal.
The exact rules depend on your loan and current regulations. Ask your lender about the cancellation rules for your loan.
How to avoid or reduce PMI
- Make a larger down payment: putting 20 percent or more down on a conventional loan may help you avoid PMI.
- Choose a different loan program: some programs, such as VA loans for eligible borrowers, may not require monthly mortgage insurance.
- Make extra payments: paying down your principal can help you reach the cancellation point sooner.
- Watch your home's value: if your home's value increases, you may be able to request cancellation with a new appraisal.
Frequently asked questions
Is PMI permanent? No. On conventional loans, PMI may be cancelled when you reach a certain equity point. Ask your lender about the rules for your loan.
Does PMI protect me? No. PMI protects the lender if you stop making payments. It does not protect you from losing the home.
Can I avoid PMI with a smaller down payment? Some loan programs do not require monthly mortgage insurance, but they may have other costs, such as a funding fee. Compare your options with a loan officer.
Is PMI the same as FHA mortgage insurance? No. PMI is private insurance on conventional loans. FHA mortgage insurance is part of the FHA loan program and has different rules.
Ready to compare your options?
When you are ready, get a free quote or get pre-approved with Alex.
You can also call Alex Al-Ammar at (313) 992-9898 or email Alex@vestalending.com.
This article is for general information only. It is not legal, tax or financial advice. PMI rules and cancellation depend on your loan and current regulations. Speak with a qualified professional about your individual situation.
