What Is Private Mortgage Insurance?
Private mortgage insurance, or PMI, may be required on certain conventional mortgage loans. PMI protects the lender against some of the financial loss that could occur if a borrower defaults on the loan.
PMI is associated with conventional loans. Government-backed mortgage programs have different insurance, guarantee, or funding structures, depending on the program. VA loans, for example, do not require monthly mortgage insurance, though other costs and eligibility requirements may apply.
PMI can be structured in different ways depending on the loan and lender. It may be included as a monthly cost, paid upfront, or structured using another available option. Your lender can explain whether PMI applies to the loan you're considering and how the cost would be incorporated.
What Can Affect the Cost of PMI?
PMI costs vary based on the mortgage and borrower circumstances. Factors such as the loan amount, down payment, credit information, loan characteristics, and other applicable criteria may affect the cost.
If PMI applies to your mortgage, your lender can provide information about the specific cost associated with the loan you're considering. Applicable mortgage insurance costs will also be reflected in the disclosures provided during the mortgage process.
Factors that may affect PMI costs include:
- Credit information
- Down payment amount
- Loan characteristics
- Loan amount
Understanding whether mortgage insurance applies and how it affects your housing payment can help you compare mortgage options during the application process.
When PMI May Not Apply
Whether PMI is required depends on the type and structure of the mortgage you're seeking.
Conventional loans. PMI requirements for conventional mortgages depend on factors such as the loan-to-value ratio and applicable loan requirements. Your lender can explain whether PMI would apply to a particular conventional loan.
VA loans. Eligible borrowers using VA financing generally do not pay monthly mortgage insurance. VA loans have separate eligibility requirements and may include a funding fee or other applicable costs. The U.S. Department of Veterans Affairs provides information about VA loan eligibility and requirements.
Other government-backed loans. FHA, USDA, and other mortgage programs have their own mortgage insurance, guarantee fee, or funding structures. These costs and requirements are different from conventional PMI.
Other financing structures. Depending on the lender and loan options available, there may be different ways to structure mortgage financing. These alternatives can have different rates, payments, fees, and qualification requirements, so comparing the complete terms of each option is important.
Down payment assistance programs. Eligible borrowers may have access to down payment assistance programs. Availability, eligibility, and program requirements vary, and receiving assistance does not necessarily eliminate mortgage insurance requirements.
A licensed mortgage professional can explain which mortgage programs may be available based on your circumstances and whether mortgage insurance applies to each option.
When Can PMI Be Removed From a Mortgage?
For certain conventional mortgages, federal law provides borrowers with rights related to PMI cancellation and automatic termination. The specific requirements depend on the loan and circumstances.
Under the federal Homeowners Protection Act, eligible borrowers may generally request cancellation of PMI when the principal balance is scheduled to reach 80% of the home's original value, subject to applicable requirements. For covered loans, PMI generally terminates automatically when the principal balance is scheduled to reach 78% of the home's original value, provided the borrower is current on the mortgage. Other requirements and exceptions may apply.
Your mortgage servicer can explain the cancellation requirements that apply to your particular loan. Depending on the circumstances, additional information or a property valuation may be required when requesting PMI cancellation.
Changes in a property's value may also affect the options available in some circumstances, but requirements vary. Contact your mortgage servicer to determine whether your loan is eligible for PMI cancellation and what steps are required.
Refinancing into a new mortgage is a separate transaction and may result in different mortgage insurance requirements depending on the new loan. Refinancing also involves qualification requirements, closing costs, and other considerations, so the complete terms of a new loan should be evaluated rather than focusing on PMI alone.
Understanding Different Types of Mortgage Insurance
While PMI is specific to conventional loans, other mortgage programs have their own insurance or fee structures that serve similar purposes.
FHA mortgage insurance. FHA loans require both an upfront mortgage insurance premium and an annual premium that is paid monthly. Unlike conventional PMI, FHA mortgage insurance typically remains in place for the life of the loan on mortgages with down payments below 10%, though specific requirements depend on the loan terms and when the mortgage was originated.
USDA guarantee fees. USDA loans include an upfront guarantee fee and an annual fee. These fees help fund the USDA loan program and function similarly to mortgage insurance on other loan types.
VA funding fees. While VA loans do not require monthly mortgage insurance, most VA borrowers pay a one-time funding fee at closing. The fee amount varies based on factors such as military service category, down payment amount, and whether the borrower has used VA loan benefits previously. Some veterans are exempt from the funding fee based on disability status or other qualifying factors.
Each mortgage program structures its insurance or guarantee costs differently, and the total cost of a loan depends on multiple factors beyond just the insurance component. Comparing the complete terms of different loan programs, including interest rates, fees, closing costs, and eligibility requirements, provides a fuller picture of the financing options available.
How Lenders Determine PMI Requirements
Lenders evaluate several factors when determining whether PMI is required on a conventional loan and how much it will cost.
Loan-to-value ratio. The loan-to-value ratio, or LTV, compares the mortgage amount to the property's value or purchase price. A conventional loan with an LTV above 80% typically requires PMI. The higher the LTV, the higher the PMI cost may be, as the lender's risk increases when the borrower has less equity in the property.
Credit profile. Borrowers with higher credit scores may qualify for lower PMI rates, while those with lower scores may face higher costs. Credit information helps lenders assess the likelihood of timely mortgage payments.
Loan characteristics. The type of property, occupancy status, loan term, and other loan features can affect PMI requirements and costs. Investment properties or second homes, for example, may have different PMI structures than primary residences.
Documentation type. The level of income and asset documentation provided during the mortgage application can also influence PMI costs on some loan programs.
Because these factors interact in different ways depending on the lender and loan program, the specific PMI cost for your situation will be detailed in the loan estimate and closing disclosure you receive during the mortgage process.
Exploring Alternatives to Traditional PMI
Borrowers who want to minimize or structure mortgage insurance costs differently may have several options, depending on their circumstances and the lender.
Lender-paid mortgage insurance. Some lenders offer conventional loans with lender-paid mortgage insurance, or LPMI. With this structure, the lender pays the mortgage insurance premium in exchange for a higher interest rate on the loan. This eliminates the separate monthly PMI payment but typically results in a higher overall monthly payment due to the increased rate. LPMI may offer tax or qualification advantages in some situations, but the higher rate remains for the life of the loan unless you refinance.
Piggyback loans. A piggyback loan structure involves taking out a second mortgage at closing to reduce the amount of the first mortgage and avoid PMI. A common structure is an 80-10-10 loan, where the borrower makes a 10% down payment, obtains a first mortgage for 80% of the purchase price, and takes a second mortgage for the remaining 10%. This avoids PMI on the first mortgage but adds the payment and interest on the second loan. The overall cost, complexity, and qualification requirements of this approach vary.
Single-premium PMI. Instead of monthly PMI payments, some borrowers choose to pay the entire PMI premium upfront at closing. This eliminates the monthly cost but requires additional cash at closing. Whether this makes financial sense depends on how long you plan to keep the mortgage and your overall financial circumstances.
Each alternative has different costs, risks, and requirements. Comparing the total cost and terms of each option with your lender helps you understand which approach fits your situation.
Understanding PMI as Part of Your Mortgage
PMI can be one component of the overall cost of certain conventional mortgages. Whether it applies, how much it costs, and how long it remains in place depend on the specific loan and applicable requirements.
Rather than considering PMI by itself, look at the complete mortgage terms provided by your lender. The interest rate, monthly payment, closing costs, mortgage insurance, loan term, and other features can all affect the overall financing.
If you're exploring a home purchase and want to understand whether PMI may apply to the mortgage options available to you, talk with a licensed mortgage professional about your circumstances and the requirements of the loans you're considering.
If you're ready to explore your mortgage financing options, connect with our team to discuss your circumstances and potential next steps.
Frequently Asked Questions
What is private mortgage insurance?
Private mortgage insurance (PMI) may be required on certain conventional mortgage loans. PMI protects the lender against some of the financial loss that could occur if a borrower defaults on the loan.
What can affect the cost of PMI?
PMI costs vary based on the mortgage and borrower circumstances. Factors such as the loan amount, down payment, credit information, loan characteristics, and other applicable criteria may affect the cost.
Does PMI apply to every mortgage?
No. PMI is associated with certain conventional mortgages. Government-backed mortgage programs have different mortgage insurance, guarantee fee, or funding structures and requirements, depending on the program.
When can PMI be removed from a mortgage?
For certain conventional mortgages, eligible borrowers may generally request PMI cancellation when the principal balance is scheduled to reach 80% of the home's original value, subject to applicable requirements. For covered loans, PMI generally terminates automatically when the principal balance is scheduled to reach 78% of the home's original value, provided the borrower is current on the mortgage. Other requirements and exceptions may apply.
Is PMI the same as homeowners insurance?
No. PMI and homeowners insurance serve different purposes. PMI protects the lender against certain losses if a borrower defaults, while homeowners insurance provides coverage related to the home and property according to the terms of the insurance policy.