Private Mortgage Insurance: What PMI Costs and How to Remove It

If you buy a home with a conventional mortgage and put down less than 20 percent of the purchase price, your lender will usually require private mortgage insurance, often called PMI. It is one of the least understood parts of a monthly mortgage payment, and many homeowners keep paying it longer than they need to.

PMI does not protect you. It protects the lender if you stop making payments and the home has to be sold for less than the loan balance. In exchange, it allows buyers to purchase a home years earlier than they could if they waited to save a full 20 percent down payment, which can make it a reasonable trade-off when used wisely.

How much does PMI cost?

PMI typically costs somewhere between about 0.3 percent and 1.5 percent of the original loan amount per year, depending on your credit score, your down payment and the type of loan. On a $300,000 mortgage, that can mean roughly $75 to $375 added to every monthly payment. Borrowers with stronger credit and larger down payments generally receive lower rates, so improving your credit before applying can reduce the cost noticeably.

Different ways to pay for PMI

The most common setup is borrower-paid monthly PMI, which is simply added to your mortgage payment. Some lenders offer single-premium PMI paid upfront at closing, or lender-paid PMI built into a slightly higher interest rate. Lender-paid PMI cannot be cancelled later, because it lives inside your rate for the life of the loan, so it is worth comparing carefully if you plan to stay in the home for many years.

When PMI comes off automatically

Under the federal Homeowners Protection Act, borrower-paid PMI on most conventional loans must be cancelled automatically when your loan balance is scheduled to reach 78 percent of the home's original value, as long as you are current on payments. It also ends at the midpoint of the loan term if it has not ended sooner. You do not need to do anything for these to happen, but you can often remove it earlier.

How to remove PMI sooner

You have the right to request cancellation once your balance reaches 80 percent of the original value. Making extra principal payments can help you get there faster. If your home has risen in value, many lenders will also consider removing PMI based on a new appraisal, often once you reach 75 to 80 percent of the current value, depending on how long you have owned the home. Refinancing into a new loan with at least 20 percent equity is another route, although closing costs need to be weighed against the savings.

Mark the date your loan is expected to reach 80 percent of the original value. That one reminder can save you hundreds of dollars a year.

FHA mortgage insurance is different

FHA loans carry their own mortgage insurance premium, known as MIP, with different rules. For many FHA borrowers who put down less than 10 percent, MIP lasts for the life of the loan, and refinancing into a conventional mortgage is the usual way to remove it. Before choosing a loan type, compare the total insurance cost over the years you expect to keep the home.

Whether you are buying your first home or trying to lower the payment on the one you already own, the Mortgage Loan team at Money Horizon Asset can estimate your PMI, compare loan options and help you build a plan to remove it as early as possible.