To get rid of PMI (Private Mortgage Insurance), you typically need to reach an 80% loan-to-value (LTV) ratio. You can achieve this by making additional mortgage payments, increasing home value through improvements, or a combination of both.
Once you reach the 80% LTV ratio, you can request PMI cancellation from your lender. Let’s find out exactly how to get rid of PMI.
What is PMI?
PMI stands for Private Mortgage Insurance. Most lenders require you to have a PMI.
The purpose of PMI is to protect the lender in case the borrower defaults on the loan. If the borrower fails to make their mortgage payments and goes into foreclosure, the PMI policy will reimburse the lender.
PMI Vs. Other Types Of Insurance
PMI (Private Mortgage Insurance) is a specific type of insurance that is distinct from other types of insurance. See the below comparison between PMI and some other common types of insurance:
Homeowners Insurance: Homeowners insurance protects homeowners from financial losses due to damage or loss of their property. It typically covers events such as fire, theft, vandalism, and certain natural disasters.
Homeowners insurance is generally a requirement by lenders to protect their investment in the property. Unlike PMI, homeowners insurance benefits the homeowner rather than the lender and covers a broader range of risks.
Health Insurance: Health insurance provides coverage for medical expenses and healthcare services. Its purpose is to protect individuals from the financial burden of necessary healthcare services.
It’s important to note that PMI is a specific type of insurance related to mortgage loans. While the other types of insurance mentioned above serve different purposes. Each type of insurance has its unique characteristics, coverage, and requirements, tailored to specific risks and needs.
What Mortgage Insurance Do You Need For Conventional Loans?
The specific type of mortgage insurance depends on factors such as the loan-to-value (LTV) ratio and the borrower’s financial situation.
Borrower-Paid Mortgage Insurance (BPMI)
Borrower-Paid Mortgage Insurance (BPMI) is commonly used for conventional loans.
BPMI is similar to Private Mortgage Insurance (PMI) as it protects the lender from default borrowers. However, the crucial difference lies in how the mortgage insurance premium is paid. With BPMI, the borrower pays the mortgage insurance premium directly as a separate monthly payment. This payment is done in addition to their mortgage payment.
Lender-Paid Mortgage Insurance (LPMI)
Lender-Paid Mortgage Insurance (LPMI) is commonly used when the borrower makes a down payment of less than 20%. With LPMI, the lender pays the mortgage insurance premium on behalf of the borrower.
Here’s how LPMI typically works:
- Higher Interest Rate: The lender includes the insurance cost into the interest rate, instead of charging the borrower. The interest rate for a loan with LPMI is usually slightly higher compared to a loan with borrower-paid mortgage insurance.
- No Separate Premium: Unlike PMI or BPMI, there is no separate monthly premium payment required from the borrower for LPMI. The mortgage payment consists of the principal and interest payments only.
- Lender’s Protection: LPMI serves as insurance coverage for the lender in case the borrower defaults on the loan. This policy reimburses the lender for his losses if the borrower fails to make his payments.
- Cancellation of Mortgage Insurance: LPMI typically cannot be canceled or removed by the borrower as it is integrated into the interest rate. However, the mortgage insurance may be terminated once the borrower reaches a certain equity ratio in his property.
FHA Loan Mortgage Insurance Requirements
FHA loans are popular among borrowers with lower credit scores or smaller down payments.
It’s important to note that FHA loans have different requirements regarding the cancellation of MIP compared to conventional loans. For loans with an LTV ratio greater than 90%, the annual MIP is required for the life of the loan.
For loans with an LTV ratio equal to or less than 90%, the annual MIP can be canceled after 11 years.
How Much Does PMI Cost?
The cost of Private Mortgage Insurance (PMI) varies depending on factors like the loan amount, loan-to-value (LTV) ratio, and more. Here are some general points to consider regarding the cost of PMI:
Percentage of Loan Amount: PMI premiums are typically calculated as a percentage of the loan amount. The percentage can range from around 0.3% to 1.5% of the loan amount per year. For example, if you have a $200,000 loan with a 1% PMI, then you would pay an annual PMI of $2,000.
Loan-to-Value (LTV) Ratio: The LTV ratio is the loan amount divided by the appraised value of the property. Generally, as the LTV ratio decreases, the PMI premium tends to decrease as well. Once the LTV ratio reaches 80% or lower, PMI may no longer be required.
Credit Score: Your credit score can also impact the cost of PMI. Typically, borrowers with lower credit scores may be charged higher PMI premiums.
Payment Frequency: PMI premiums are usually paid on a monthly basis and are added to your mortgage payment. However, some mortgage insurance providers may offer the option of annual or upfront payment of PMI.
Please note that the specific cost of PMI will vary based on individual circumstances and the terms of the loan. Speak to your lender to get an accurate estimate of the PMI cost for your specific situation.
What Does PMI Cover?
Private Mortgage Insurance (PMI) covers the lender, not the borrower. Its purpose is to protect the lender in the event that the borrower defaults on the mortgage loan. Entering foreclosure safeguards the lender’s loss if the borrower ceases making mortgage payments.
PMI coverage typically includes the following:
- Principal and Interest
- Default and Foreclosure Costs
- Mortgagee’s Loss
It’s important to note that PMI does not provide any direct benefit or coverage to the borrower. PMI allows borrowers to obtain a mortgage loan with a smaller down payment, along with an additional monthly premium.
When Does BPMI Go Away?
Borrower-Paid Mortgage Insurance (BPMI) typically goes away under specific circumstances. The exact rules and requirements for BPMI removal can vary depending on the loan terms. Here are some common scenarios when BPMI may go away:
Loan-to-Value (LTV) Ratio Reaches 78%: Once the borrower’s loan-to-value (LTV) ratio reaches 78% based on the original property value, BPMI may be automatically canceled. This means that if the borrower has paid the loan balance down to 78% of the home value, the BPMI will be terminated.
Request for Cancellation: The borrower may be able to request the cancellation of BPMI once the LTV ratio reaches 80% or lower based on the original property value. It requires the borrower’s good credit history and other certain criteria set by the lender.
To determine the specific rules and requirements for BPMI removal, borrowers should review their loan documents. The borrower should consult with their lender, and familiarize themselves with the applicable regulations and guidelines.
When Does LPMI Go Away?
Lender-Paid Mortgage Insurance (LPMI) does not go away! The lender incorporates the cost of the mortgage insurance into the interest rate of the loan.
Here, the mortgage insurance cost is spread out over the life of the loan. The borrower does not have the ability to remove PMI or cancel the mortgage insurance portion separately. Unless the loan is refinanced or paid off, the LPMI premium continues for the entire duration of the loan.
How To Get Rid Of PMI
To get rid of Private Mortgage Insurance (PMI) on a conventional loan, you typically need to meet certain requirements. Here are common methods to eliminate PMI:
Reach 80% Loan-to-Value (LTV) Ratio: PMI is necessary until your loan balance reaches 80% of the purchased price of the home. At this point, you may be able to request PMI cancellation.
Request PMI Cancellation: Once you believe you have reached 80% LTV, contact your lender to request PMI cancellation. They will likely require an appraisal to verify the property’s current value and confirm the LTV ratio achieved.
Automatic PMI Termination: PMI may be automatically terminated when you reach the midpoint of your loan term, regardless of your LTV ratio.
Refinance the Loan: If you have built up sufficient equity in your home, you can consider refinancing your mortgage. With a new loan, you may no longer need PMI if your LTV ratio is below 80%. However, consider the costs and potential impact on interest rates before deciding to refinance.
It’s advisable for borrowers to consult with their lender or mortgage professional to understand the specific mortgage insurance requirements for their conventional loan, as they can vary based on the loan program, credit score, and other factors.
Frequently Asked Questions
When does PMI go away?
PMI typically goes away when the borrower reaches 80% loan-to-value (LTV) ratio based on the original home price. Borrowers can request PMI cancellation once they meet this requirement, or it may be automatically terminated when they reach the midpoint of the loan term (e.g., 15 years on a 30-year mortgage) if their mortgage payments are current.
Can PMI be removed if my home’s value increases?
Yes, if the value of your home increases significantly, it can potentially help you remove Private Mortgage Insurance (PMI) sooner.