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| Potential Monthly PMI Payments | ||||
|---|---|---|---|---|
| 5% Down Payment | 10% Down Payment | 15% Down | 20% Down | |
| Monthly PMI Payment | $365 | $234 | $95 | $0 |
How Long Do You Have to Have PMI?
Typically, you will pay for PMI until you have achieved 20% equity in your home. Home equity is the current value of your home minus the amount remaining on your mortgage.
Your lender may automatically cancel the PMI payments once you reach that 20% in equity. You can make additional payments to reach 20% and request your lender to cancel PMI ahead of the scheduled date.
If you are refinancing your mortgage, you may have to pay PMI. If your loan-to-value (LTV) ratio is more than 80%, a conventional lender may require PMI. Lenders consider a loan with a higher LTV ratio to be higher risk, which is why they may require PMI to mitigate that risk.
Benefits of PMI
PMI is a type of insurance that lenders use to offset risk. It does not provide borrowers with any protection. If you do not make your loan payments, you are still at risk of foreclosure. You are also still responsible for paying for homeowners insurance.
While PMI is an additional cost for borrowers, it does offer potential benefits.
If you are not able to make a 20% down payment on a home, you still have the option of securing a mortgage with PMI and purchasing a home. PMI may also help borrowers with their loan eligibility.
Types of PMI
Different types of PMI have different payment structures to consider.
Investopedia / Eliana Rodgers
1. Borrower-Paid Mortgage Insurance
Borrower-paid mortgage insurance (BPMI) is the typical type of PMI. With this type of mortgage insurance, lenders will add the cost of the PMI to the borrower’s monthly payment. The borrower will make that additional payment until they achieve 20% equity in their home.
2. Single-Premium Mortgage Insurance
Single-premium mortgage insurance requires borrowers to make a one-time payment at the time of closing rather than making monthly payments.
3. Lender-Paid Mortgage Insurance
As the name suggests, the lender shoulders the cost of the PMI with lender-paid mortgage insurance.
Only certain lenders offer this option. Borrowers could have lower monthly payments without the cost of PMI, but there are some other considerations. Lenders may increase your interest rate to cover the costs of the PMI, and this type of PMI cannot be removed from your loan regardless of how much equity you have in your home.
4. Split-Premium Mortgage Insurance
Split-premium mortgage insurance blends elements of borrower-paid mortgage insurance and single-premium mortgage insurance. The borrower is responsible for the costs of this type of PMI. They will make an upfront payment at closing, as well as monthly payments. Those monthly payments will be paid from your escrow account.
Split-premium mortgage insurance offers borrowers flexibility. You can reduce how much cash you need at closing and secure lower monthly payments.
5. Federal Home Loan Mortgage Insurance Premium (MIP)
A federal home loan mortgage insurance premium (MIP) is a type of mortgage insurance associated with loans backed by the Federal Housing Authority (FHA) rather than a private lender.
FHA-backed loans can make home ownership more accessible because they come with low down payments, low closing costs, and lower credit score requirements. However, those lower down payments and credit score requirements could mean higher risk for lenders.
If you choose an FHA-backed loan, you will have to pay an MIP regardless of the down payment you make. You will pay an upfront cost of 1.75% of the base loan amount at closing. If you do not have the cash to pay for this fee, you do have the option of moving into your mortgage, which will increase your monthly costs.
In addition to the upfront fee, you will also pay a monthly fee to cover the MIP. The annual amount is 0.15% to 0.75% of the loan amount.
The rules for removing mortgage insurance from an FHA loan is different than the rules that apply to conventional loans. Your ability to remove the MIP depends on your original down payment and when you took out the loan. If you do not meet those criteria, you can explore refinancing your FHA-backed loan to a conventional loan.
The Bottom Line
Lenders use PMI as a way to offset risk. Borrowers have the option of paying the additional cost of PMI in exchange for making a lower down payment.
Before moving forward with a mortgage that includes PMI, consider the different types of mortgage insurance and how the additional expense will impact the overall cost of your loan. When you reach 20% equity in your home, you no longer need to pay for PMI. If you have a MIP, you may need to pay that for the lifetime of the loan.
