What is PMI and Do You Still Need to Pay It?
December 3, 2021
Private Mortgage Insurance (PMI) is often required if you buy using a conventional loan and have a down payment of less than 20 percent. If you have PMI, you probably have noticed it can add hundreds of dollars to your monthly mortgage payment depending on your rate, and it doesn’t protect you. Its only benefit is that it helps you secure a mortgage. PMI is designed to protect your lender in case you default on your mortgage or the home goes into foreclosure.
If you are securing a conventional loan and have less than 20 percent to put down, there are two options for PMI: borrower-paid mortgage insurance (BPMI) and lender-paid mortgage insurance (LPMI). If you choose BPMI, the financial institution that holds your loan will tack on a fee to your monthly mortgage payment. Once you reach 20 percent equity in your home, you can request to cancel your PMI.
Your other option is LPMI. If you decide to take this route, you will not have to pay a monthly fee. However, you will receive a higher interest rate than if you elected for PMI. It is also important to note that you can’t cancel LPMI. According to Rocket Mortgage, LPMI sticks with you for the entirety of your loan – even if you reach 20 percent equity in your home. The only way to get rid of LPMI is to reach the 20 percent threshold and refinance. If you decide to go with LPMI, you have the ability to pay all or a portion of your PMI costs at closing. Your interest rate depends on how much you pay towards your LPMI when you close on your home.
If you have an FHA loan, then you pay a mortgage insurance premium (MIP). This type of insurance affords the same protections to your lender as PMI. The only difference is that you must pay at closing and each month as part of your monthly mortgage payment. If your down payment is less than 10 percent, you must pay MIP for the entirety of your loan. With that being said, if you pay 10 percent, you only have to pay MIP for 11 years.
How much you pay for PMI depends heavily on your credit score, the size of your down payment, and the type of loan you receive. Other factors include your debt-to-income ratio, the type of property you are purchasing, and your home’s value.
How to get rid of PMI?
Getting rid of PMI depends heavily on which of the three PMI options you have: BPMI, LPMI, or MIP.
If you have BPMI, you may want to make extra monthly payments on your loan to get rid of your PMI quicker. If you do this, you have to notify your lender that you want those payments to go toward your principal. This is because many lenders will automatically apply those extra payments to your next monthly mortgage payment. Before you decide to do this, you should notify the financial institution that holds your loan. Many lenders and several types of loans don’t allow you to make extra monthly payments with the explicit intent to remove PMI quicker.
With BPMI there are several steps that need to be taken before you can get rid of PMI:
- You have to reach 20 percent equity in your home.
- Notify your lender as soon as you have reached 20 percent equity in your home. They may not automatically cancel it until you have reached 22 percent.
- Ensure that you are no longer paying PMI. You can do this by asking for a confirmation of PMI removal and double checking that your monthly payments are, in fact, lower.
The steps for LPMI and MIP include:
- Reach 20 percent equity in your home and refinance.
- When you decide to refinance, compare lenders and see what their policies/refinancing standard are to ensure that you qualify.
- Apply for refinancing.
- Then, it is a waiting game until the underwriting and appraisal of your home are cleared.
- Reply to your lender stating that you have received and acknowledged your closing disclosure.
- Go to closing!
It is important to follow the requirements of your lender and the type of loan you have for proper PMI removal. If you have reached 20 percent equity in your home and are looking to refinance, we would love to have your business. Contact us today at (855) 88-MLEND to see if you qualify!