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There are a few forms of insurance that might be a part of your homebuying situation, and one that's particularly unique is known as private mortgage insurance, or PMI. Required in many cases, but also possible to remove at certain points within most mortgage programs, PMI is important to know about for many buyers.
At Primary Residential Mortgage, it's our pleasure to assist clients with a huge range of mortgage loan options, from FHA and VA loan programs to jumbo loans for larger purchases and more. What is private mortgage insurance, what are the types out there, and why is it required in many mortgage situations? Plus, how can you often remove PMI after a certain period of time? Here's a primer on everything you need to know.
Private Mortgage Insurance Basics
For those who have never heard of PMI before, it's simply insurance that borrowers are required to purchase in some cases when they're putting less than 20 percent down on their new home. This is because lenders see these buyers as being at a higher risk of defaulting on their loan, so the PMI protects them in case this happens.
Down these lines, it's important to realize that PMI is in place not for the benefit of the borrower, but for the lender. As such, it's generally paid for by the borrower as a monthly premium that's built into their mortgage payment.
Types of PMI
There are a few different types of private mortgage insurance that might be utilized depending on your situation:
- Buyer-paid PMI: By far the most common, this is the type of PMI that borrowers pay for as part of their monthly mortgage payment. This sort of payment is almost always lumped into your mortgage payment, so you might not even realize that it's there unless you take a close look.
- Lender-paid PMI: With this type of PMI, the lender essentially pays for the insurance on your behalf and then raises your mortgage interest rate to cover the cost. So while you're not physically paying anything out of pocket for the insurance each month, you're still technically paying for it in the form of a higher mortgage rate. This is a much rarer format that is only used in certain specific situations.
- Single-premium PMI: With the single-premium format, your entire private mortgage insurance costs will be paid up front in a single lump sum as part of your closing, and you will be covering it as the buyer. This type of PMI is also somewhat rare, as it is non-refundable and does not allow you to cancel the insurance early.
- Split-premium PMI: The split-premium format is a mix of the previous two, in that you pay part of your total PMI costs up front at closing and then finance the rest as part of your mortgage principal. This type of PMI does give you some ability to cancel early if you meet certain conditions.
- Federal Home Loan Mortgage Protection (MIP): This is a separate program that's only available to those with FHA loans, and is required for down payments under 10% rather than 20%. It can be lifted through refinancing in many cases, or will be automatically lifted after 11 years. Generally, this form is paid based on a split-premium arrangement.
When PMI is Required
As we noted above, the typical requirement for private mortgage insurance is a down payment of less than 20 percent on your new home. However, there are some other scenarios where you might also be required to purchase PMI:
- FHA loans with under 10% down: In addition to the regular MIP that comes with every FHA loan, you'll be required to purchase PMI if your down payment is under 10 percent.
- VA loans with no money down: You're not technically required to purchase PMI with a VA loan, but lenders will often require it if you're putting no money down on your new home.
- Some conventional loans: While most conventional loans above 80 percent loan-to-value (LTV) do not require PMI, there are a few that do. In general, these are portfolio loans that are held by the lender rather than being sold on the secondary market.
Removing PMI
Luckily, in nearly all cases, PMI does not have to stick around forever. For almost all loan programs, with the exception of FHA loans (more on these in just a moment), PMI must be automatically cancelled by your lender once you reach 20% or 22% equity in your home, depending on the program. In addition, you can generally apply for the removal of PMI even earlier than this, often at 20% equity or even less than this in some cases -- this may vary from lender to lender, however.
For FHA loans, there is a different process for removing MIP. In this case, MIP will automatically be removed after 11 years if you're paying on time and have not refinanced your loan during that period. If you do refinance, you might be able to remove it early in some cases, but this will vary depending on when you took out the loan and other factors.
As you can see, private mortgage insurance is a complicated topic with a lot of different facets to consider. However, it's important to understand if you're planning to buy a home with less than 20 percent down, as it will likely be a part of your mortgage situation. Work with your lender to determine if PMI is required in your case, and to understand the different options for financing it if so.
For more on this, or to learn about any of our mortgage rates or quality loan programs, speak to the staff at Primary Residential Mortgage today.
*PRMI NMLS 3094. PRMI is an Equal Housing Lender. Some products and services may not be available in all states. Credit and collateral are subject to approval. Terms and conditions apply. Programs, rates, terms, and conditions are subject to change and are subject to borrower(s) qualification. This is not a commitment to lend. Opinions expressed are solely my own and do not express the views of my employer.