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Private mortgage insurance (PMI) is used to help people to buy a home with less than a 20% down payment. Despite the fact that PMI allows millions of people to buy a home sooner than later, many consumers want to get rid of PMI if they can. This article details what PMI is and how you can secure a mortgage with no PMI in many cases.
If you want to get rid of your PMI payment each month, you have a few basic options worth mentioning up front:
- Make a 20% down payment! Yes, we know this option is rather obvious, but we thought we would mention it. If you can put together the cash, it is a good idea to put down 20% or even more. You will get the very best interest rates and will have a lower monthly payment to boot.
- If you are in the military or are a retired veteran, you can often qualify for a VA loan which never charges you mortgage insurance.
But if you cannot do either of these options, there are still some other choices. First, you may be able to get lender paid mortgage insurance or LPMI. This is similar to PMI but the lender pays the insurance for you. To pay for your mortgage insurance, most lenders will require you to have a mortgage rate hike of .75%. This may work for you, but you need to check with your lender to see if they offer it. Also, LPMI cannot be cancelled like regular PMI, so you will pay that higher rate for the life of the loan. Whether that works for you depends upon your financial goals.
Another option is to use piggyback financing. This type of structure requires a 10% down payment in most cases. In this loan, the buyer brings a down payment of 10% to the closing table. Instead of getting a 90% mortgage, the buyer takes two mortgages, one on top of the other. The most common scenario is an 80% first 10% second and a 10% down payment. This also may be called an 80/10/10. If you are buying a condo, a 75/15/10 piggyback loan is the most common.
How to Eliminate PMI After I Buy?
If you already have your home and are paying PMI, you probably want to get rid of it. Generally, your PMI cannot be cancelled until your loan balance drops to 80% or less of your home’s appraised value, or 80% of the home’s current value.
There are some restrictions for cancelling PMI though. You could be asked to show that you have paid your mortgage on time for at least one or two years. Lenders are always required to give you an update every year about your options to cancel PMI.
One of these updates must include a notice of the Homeowners Protection Act of 1998. This requires mortgage lenders to terminate PMI when you reach 78% LTV. This is based upon the purchase price OR the appraised value from the date of purchase/refinance, whichever is less.
You must be current on your mortgage when you get to 78% LTV to have PMI taken off. If you are not current, PMI will be eliminated on the first day of the first month that you are current.
The Homeowners Protection Act of 1998 also mandates that homeowners may ask to cancel PMI once they reach 80% LTV, based upon the original value of the home. But you do need to contact the lender in writing to do this; they will not contact you before you reach 78% LTV. So, it is wise to keep close track of when you reach 78% LTV to cancel PMI as soon as you can.
What PMI Costs
PMI costs vary depending upon your lender, credit score, down payment and other factors. Generally, the less money you put down, the more PMI will cost. This is because you are a higher risk to the lender. Generally PMI can cost anywhere from .30% to 1.15% of your loan balance per year. The rate will be influenced also by how long the loan is.
PMI costs are usually paid each month with 12 equal payments. However, your PMI costs can change from year to year.
Mortgage Insurance for FHA Loans
If you have an FHA mortgage, you also are probably paying for mortgage insurance, called a mortgage insurance premium or MIP. If your home is worth less than $625,500 and you put down less than 5%, you will pay approximately .80% of your loan balance each year in mortgage insurance premiums. You also have to pay an upfront mortgage insurance premium when you take out the loan; it can be wrapped into the mortgage.
Importantly, MIP cannot always be cancelled. If your loan was issued after June 2013 and you put down less than 10%, you cannot cancel MIP. Your only option is to refinance into a conventional mortgage once you have 20% equity in the property. If you put down 10% or more, you can cancel MIP after 11 years.