What Is Private Mortgage Insurance, Anyway?

By Dan Rafter on 3 May 2016 0 comments

Private Mortgage Insurance is one cost that mortgage borrowers hate to pay. And that's not surprising given than this form of insurance — Private Mortgage Insurance — doesn't actually protect homeowners. Instead, it protects mortgage lenders from borrowers who don't make their mortgage payments on time.

PMI isn't cheap, either: Freddie Mac says that you can expect to pay from $30 to $70 a month in PMI costs for every $100,000 you have borrowed. According to this formula, you'd pay from $60 to $140 a month in PMI for a $200,000 mortgage.

There is good news, though: Conventional mortgage borrowers won't need PMI if they have a large enough down payment. And even if you don't, your lender must drop PMI when you build up enough equity.

The PMI Hit

You'll need PMI if you have a conventional mortgage loan — one not guaranteed by the government — whenever you borrow with less than a 20% down payment.

Fortunately, PMI isn't permanent on a conventional loan. You can ask your lender to drop PMI when the equity in your home reaches 20%. For instance, if your home originally appraised at $200,000 and you owe $160,000 on your mortgage loan, you now have 20% equity in your residence. If you owe $180,000 on your mortgage and your home is worth $200,000, you only have 10% equity in your home and must keep paying your PMI.

If the balance of your mortgage drops to 78% of your home's original appraised value, your lender will automatically drop your PMI.

If you want to calculate whether you can eliminate PMI, simply divide the balance of your mortgage loan into the original appraised value of your home. Most often, this appraised value will be the same as your home's original selling price.

Dropping PMI

If you want to drop PMI when your loan value reaches 80% of your home's original purchase price — which is the same as reaching 20% equity — you must request the cancellation in writing, sending a letter to your lender. You'll need to be current on your mortgage payments, and you might have to pay for a new appraisal to prove that your home hasn't lost value since you purchased it.

When you take out your loan, your lender should provide you with the date on which, if you made your monthly mortgage payments as scheduled, your equity would reach the 20% level. You might reach this equity level earlier, though, if you've made additional payments. You might also reach it sooner if your home appreciates in value. But you'll need a new appraisal to prove that your home's value has risen.

FHA Mortgage Insurance

If you take out a mortgage insured by the U.S. Department of Housing and Urban Development's Federal Housing Administration, you must take out a different form of mortgage insurance. And this insurance is required, no matter how much of a down payment you put down.

First, you'll need to make an upfront payment of 1.75% of the amount of your loan. If you take out a mortgage for $100,000, you'll have to pay $1,750 for this upfront premium.

You'll also have to pay an annual premium, which you'll pay out in monthly installments throughout the year. For a 15-year fixed-rate loan with a down payment or equity of less than 10%, your annual FHA insurance premium will be 0.7%. For a 15-year loan with a down payment or equity of 10% or more, your annual premium will be 0.45%.

For a 30-year loan and with a down payment or equity of less than 5%, your annual insurance premium will be 0.85%. For a 30-year loan with a down payment or equity of 5% or more, your annual insurance premium will be 0.80%.

Did you have to pay PMI? For how long?

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