Private Mortgage Insurance, or PMI, is an insurance policy that you pay for that protects your mortgage lender from financial loss if you stop making mortgage payments. Your lender may have listed PMI as a requirement in your mortgage, dependent on your credit score, down payment and other factors.
It’s possible to exempt yourself from these payments, but you must meet certain criteria first. Below, we answer some of the most common questions we receive about PMI.
How does PMI work?
If you fall far enough behind on mortgage payments that your lender is forced to foreclose on your home, the lender can typically recover about 80% of your home’s appraised value at auction. Your PMI then pays your lender the remaining value of the property.
Does PMI pay my mortgage if I am unable to pay?
No. Your PMI policy insures only your lender against financial loss; it does not make mortgage payments for you if you are unemployed or otherwise unable to pay. Some mortgage companies also sell “mortgage insurance,” which pays your mortgage if you can’t for various reasons—but that’s not the same as PMI.
How much does PMI cost?
You should know up front that PMI can significantly increase your expected mortgage payment. PMI requirements can vary depending on the size of your down payment, your credit score, the type of mortgage you have and other factors. For instance, PMI is required on most FHA and VA loans, as well as some “non-traditional” loan types.
Traditional mortgage loans from a bank or well-reputed mortgage company often carry a loan calculation based on the total amount you borrow—typically 0.5% to 1.5% of your total loan amount. Some lenders might let you pay your PMI all at once during closing, but most homeowners choose to split this major cost into monthly payments that are stacked on top of their mortgage payments.
Be aware that even if you spread your PMI costs over years, PMI is still a considerable chunk of change. For example, if you buy a $400,000 house and put $40,000 down (10%), your loan amount is $360,000. If your PMI rate is 1% of your loan, your annual PMI costs $3,600, or $300 a month. That can be a pretty hefty ask of some homeowners, particularly on top of their mortgage payment.
How can I cut down on my PMI costs?
The simplest way to cut PMI costs from the get-go is to put more money down when you purchase your home. For instance, a down payment of 15% will likely get you a lower PMI premium rate compared with a down payment of 10%. In many instances, if you pay 20% down, your lender won’t require PMI at all.
Can I cancel my PMI?
It is possible—but depending on your situation, it might take some time before you’re able to cancel. Based on what kind of loan you have, you must satisfy certain requirements:
Conventional Loans
If you have a conventional single-family mortgage (not one from Fannie Mae®, Freddie Mac®, the FHA or the VA), and your loan closed on or after July 29, 1999, government regulations allow your lender to cancel your PMI after you’ve paid down 20% or more of your home’s value (the value it was appraised for your current mortgage). Put another way, your loan-to-value ratio must be 80% or lower for your lender to consider canceling your PMI. Additionally:
· Your house must have been your primary residence for more than 24 months.
· You must have paid your mortgage on time for 12 consecutive months.
· You don’t qualify for PMI cancellation if you have made a payment more than 60 days late in the 24 months prior to your request to cancel.
· Your cancellation request must be submitted in writing.
If your lender doesn’t cancel your PMI once you’ve paid down 20% of your home’s value, be patient— your lender is required to cancel PMI once you’ve paid down 22%, as long as your home is your primary residence and your mortgage payments have come in on time.
Fannie Mae®/Freddie Mac® Loans
If your mortgage is underwritten by Fannie or Freddie, your cancellation options are comparable to a conventional loan. Fannie and Freddie sometimes allow you to cancel PMI on residential properties that aren’t your primary residence. However, certain cancellation rules through Fannie Mae® and Freddie Mac® can be pretty confusing. If you have a loan with Newrez, please message us online to learn more about cancelling your PMI if you have one of these loans.
FHA and VA Loans
Cancellation requirements are very different if you have a Federal Housing Administration or Veterans Affairs mortgage. While these loan types allow you to put very little money down on your mortgage (or even none), canceling PMI is tricky. Here’s just one example: The FHA might cancel your PMI—if you make payments on your loan for at least 11 years, assuming your origination date occurred after June 3, 2013. However, if you’ve put less than 10% down on your home, the FHA will not cancel your PMI under any circumstances. If you’re our customer and you have questions, message us online through the chat function on your dashboard.
Are there other ways to decrease my PMI payment?
There are two alternative ways to lower your PMI payment:
Pay More Principal
Your mortgage principal balance is the amount you owe on your home, not including the interest you pay. If you’re able to pay above your current mortgage payment by paying extra on your principal, you’ll reach 20% down sooner, and therefore you may be able to cancel your PMI sooner.
Monitor Shifts in Home Value
Keep an eye on your home’s value. In a strong housing market, your home’s value may increase significantly. If this occurs, reach out to us to request a new valuation. A higher home value can bring down your loan-to-value ratio, which could allow you to cancel your PMI sooner. (Note: Your valuation will be subject to Newrez valuation costs.)
Anything else I should know?
The difficulty of canceling your PMI will depend on how much equity you have and your loan type. This article doesn’t cover every possible circumstance, so if you have more questions, don’t hesitate to message us through online chat.
Fannie Mae® is a registered trademark of the Federal National Mortgage Association.
Freddie Mac® is a registered trademark of the Federal Home Loan Mortgage Corporation.
None of the above mentioned companies are affiliated with Newrez LLC.