If a borrower is not putting 20% down on a purchase, private mortgage insurance (PMI) will be a factor to consider when calculating monthly housing budget. PMI is insurance that protects the lender against losses in the rare case that a borrower is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property. There are a few ways a borrower can choose to structure their PMI based on individual loan program requirements.
- Monthly PMI: The premium is paid monthly to the servicer, along with the principal and interest payment. The monthly premium varies for every borrower and is based on credit score, loan amount and down payment amount. If a borrower chooses this option, there are generally two ways to drop PMI from your home loan:
- Requesting PMI Cancellation: A borrower has the right to request that their servicer cancel PMI when they have reached the date when the principal balance of their mortgage is scheduled to fall to 80 percent of the original value of their home. This date is provided on a PMI disclosure form if they obtain a mortgage, and their servicer should be able to help identify this date as well. A borrower can ask to cancel PMI earlier if they have made additional payments that reduce the principal balance of their mortgage to 80% of the original value of their home. Important criteria for canceling PMI on a loan includes good payment history, being current on payments and evidence that the value of the property has not declined. When requesting cancellation of PMI, the request must be in writing, and the servicer may require an appraisal at the borrower’s expense.
- Automatic PMI Termination: Even if the borrower doesn’t ask the servicer to cancel PMI, the servicer must automatically terminate PMI on the date when the principal balance is scheduled to reach 78% of the original value of the home. For PMI to be canceled, the borrower needs to be current on payments on the anticipated termination date; otherwise, PMI will not be terminated until after payments are brought up to date.
- Lender-Paid PMI (LPMI): LPMI is built into the cost of the loan, resulting in a higher interest rate. The amount the rate will increase varies for every borrower based on a number of factors, such as credit score, loan amount and down payment amount. If the borrower chooses this option they will not have a monthly PMI payment, and the increase in the amount of interest paid monthly may be less than a monthly PMI payment would be for the same loan. LPMI cannot be removed for the life of the loan, regardless of the equity stake that gained in the home. The only way to remove LPMI is to refinance or pay off the loan.
- Single Premium PMI (SPMI): The borrower pays for the SPMI premium as a one-time lump sum payment. The cost of the premium payment varies for every borrower and is based on credit score, loan amount and down payment amount. There are two ways to pay for the premium:
- Financed single premium: The PMI premium is added to the loan amount and paid for over the full term of the loan as a part of the mortgage payment.
- Non-financed single premium: The PMI premium is paid at closing with the rest of the standard closing costs.
*Subject to individual loan program requirements.