What is PMI? How to Avoid or Remove Private Mortgage Insurance Roger Odoardi Private mortgage insurance, more widely known as PMI, is a necessary evil for some homebuyers engaged within today’s mortgage industry. Similar to how car dealers insist buyers purchase automobile insurance, lenders within the mortgage industry expect certain borrowers to purchase PMI when buying a home. The reasoning has everything to do with risk. What is PMI? The Consumer Financial Protection Bureau, a government agency designed to aid consumers in understanding complexities of the finance markets, defines PMI as the following: Private mortgage insurance (PMI) is a type of mortgage insurance used with conventional loans. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan. PMI is arranged by the lender and provided by private insurance companies. In essence, PMI is how a lender intends on reimbursing itself if a borrower defaults on a home loan. Typically, PMI is required of borrowers who make a down payment of less than 20% of the home’s purchase price. So, for example, if a home is worth $300,000, a borrower would be required to pay PMI if they put down anything less than $60,000 (20% of the $300,000 purchase price). PMI is also required for government backed loans, such as FHA loans. These types of home loans come with their own set of stipulations related to when and if you can cancel PMI, however. How is PMI Calculated? The PMI a borrower pays is heavily dependent upon a number of factors. These include: Term of mortgage—The length of mortgage terms, which could be anywhere from 10, 20 or even 30 years. Financial status—Credit worthiness (i.e. credit score) Down payment—The amount of money put down during the closing of a loan. Here’s an example of how PMI would be calculated for a $300,000 purchase with 5% down payment (loan amount of $285,000). Assuming a 740 credit score, and a purchase on a primary residence single family home, the PMI factor would be 0.62%. Calculation: $285,000 x 0.62% = $1,767 annual cost / 12 = $147.25 monthly premium Paying for PMI The way a borrower pays for PMI is almost entirely up to the lender. Some lenders offer only one option, while others offer multiple ways to pay PMI. Here’s a glimpse of the most common options: A monthly premium is the most common form of PMI payment offered by lenders. This option takes the PMI payment and adds it to a borrower’s monthly mortgage payment. Think monthly installments. An upfront premium is a one-time up front premium paid at closing. This single premium option is most common for conventional financing options. An upfront and monthly premium is a combination of both types of payment options. This type of payment option is typically required of borrowers using a government insured mortgage product, like the Federal Housing Administration (FHA) or United States Department of Agriculture (USDA). How to Avoid Paying PMI There’s really only two ways a borrower can avoid PMI. These options include: Make a down payment of 20% or more. Apply for a VA loan (if eligible). A VA loan however only avoids the monthly mortgage insurance payment. A borrower still has to pay the upfront premium, unless he or she is a disabled veteran. Another option involves Lender-Paid Mortgage Insurance (LPMI), which is just like regular PMI, only the lender pays for it on a borrower’s behalf. This however may come with it’s own set of stipulations—such as an increase in your mortgage rate. A borrower can also look into getting a Piggyback Mortgage. How to Get Rid of PMI Getting rid of PMI is pretty simple. All a borrower has to do is pay down the loan’s principal balance to 80% or lower of the home’s original appraised value, or to 80% of the home’s current market value. All this means is that a borrower must show they have at least 20% equity in the property. In order to do this a borrower must satisfy a certain number of things, which can vary from lender to lender. This includes: Show a positive payment history Prove loan is current and up to date Conduct an updated appraisal A borrower can ask to have PMI cancelled when they have paid down the mortgage balance to the aforementioned 80% of the homes’ original appraised value. Otherwise, the lender is required to eliminate PMI when the borrower’s balance drops below the 78% threshold. At Blue Water Mortgage, we understand that a home mortgage loan is all about the monthly payments. If you’re like many potential borrowers who are unable to come up with a large down payment and are thereby required to get private mortgage insurance, it’s a good idea to examine the best scenarios to ensure that your monthly payments don’t balloon well past your comfort zone. Contact us today to discuss how we can help you get the ideal terms on your monthly home mortgage loan. Roger Odoardi Roger is an owner and licensed Loan Officer at the Blue Water Mortgage office in Hampton, NH. Roger graduated from the University of New Hampshire Whittemore School of Business and has been in the mortgage industry for over 20 years. Roger has originated over 2500 residential loans and is licensed in New Hampshire, Massachusetts, Maine, Connecticut and Florida.