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What is PMI and When Do I Need to Pay PMI?
If you make a down payment of less than 20% when you buy a home, lenders typically require the borrower to purchase private mortgage insurance, which is also known as PMI. PMI is insurance against loss from mortgage default provided to the lender by a private insurance company. In other words, the borrower pays for an insurance policy that protects the lender in case you cannot pay your mortgage. Please note that PMI does not protect the borrower if you fail to pay your mortgage or lose your home to foreclosure. PMI typically requires the borrower to pay an ongoing monthly fee when you make your mortgage payment or a one-time upfront fee, which is relatively uncommon.
The borrower is only required to pay PMI as long as the loan-to-value (LTV) ratio is greater than the lender's maximum LTV threshold which is 75% - 80%, depending on when you make the cancellation request and if your cancellation request is based on your original property value at the time your mortgage closed or your current property value. The LTV ratio represents the ratio of the mortgage amount to the fair market value of the property and is inversely related to the down payment the borrower makes. For example, if the borrower makes a 5.0% down payment, the LTV ratio is 95.0% and if the borrower makes a 15.0% down payment the LTV ratio is 85.0%. The LTV ratio decreases as the borrower pays down the mortgage balance over time or if the property value increases. The borrower can request to have the PMI fee cancelled when he or she believes the LTV ratio is below the maximum threshold.
- Use ourDOWN PAYMENT CALCULATOR to determine the LTV ratio based on your down payment
PMI rates vary depending on several factors including:
- Loan-to-Value (LTV) Ratio: the higher the LTV ratio, the higher the PMI fee
- Credit Score: the higher your credit score, the lower the PMI fee
- Mortgage Term: the shorter the mortgage term, the lower the PMI fee
- Mortgage Type: fixed rate mortgages have lower PMI fees than other mortgages such as adjustable rate mortgages (ARM)
- Mortgage Amount: the PMI fee is higher for mortgage amounts greater than $650,000
- Cash-Out Refinancing: there is an additional PMI fee for a cash-out refinancing
- Investment Property / Second Home: there is an additional PMI fee if the property being finance is an investment property or second home
If you are required to pay PMI, borrowers typically select the ongoing fee option, which is an extra monthly payment on top of your mortgage payment. For a conventional loan, if you decide to pay for PMI on an ongoing monthly basis, you do not pay a one-time upfront PMI fee. As outlined in the table below, the ongoing PMI fee depends on many factors including your credit score and LTV ratio. It is important to highlight that the ongoing PMI is based on your mortgage balance at the beginning of the year, not your original loan amount, so it declines over time as you pay down your loan.
The table below shows the ongoing PMI fees for a thirty year fixed rate mortgage, as a percentage of the loan amount. The table demonstrates how ongoing PMI fees vary by LTV ratio and credit score with higher credit scores and lower LTV ratios having lower PMI rates. For example, according to the PMI pricing table below, a borrower with a 700 credit score and 97% LTV ratio pays an ongoing PMI fee of .99% of the loan amount. if your mortgage balance is $100,000 and the ongoing PMI fee is .99%, then your monthly PMI fee is $82.50 ($100,000 * 1.115% = $990 / 12 months = $82.50 per month).
Please note that the table below shows the ongoing PMI fees for a 30 year fixed rate mortgage at the maximum coverage level. The PMI fee is higher for adjustable rate mortgages (ARMs) although a mortgage with an interest rate that does not adjust within the first five years is considered a fixed rate mortgage for the purpose of calculating PMI (so a 5/1 and 10/1 ARM are considered fixed mortgages). The required ongoing PMI fee is also lower for mortgages with terms of 20 years or less.
Finally, there are different coverage levels for PMI, or how much of the mortgage is protected by the insurance. For example, for a mortgage with an LTV ratio between 95.01% and 97.00% you can purchase PMI that covers 18%, 25% and 35% of the loan balance. The amount of coverage required depends on the LTV ratio, mortgage program and lender policy. Most lenders and mortgage programs require maximum PMI coverage levels which are 35% of the loan amount (for LTV ratios between 95.01% and 97.00%), 30% of the loan amount (for LTV ratio between 90.01% and 95.00%), 25% of the loan amount (for LTV ratio between 85.01% and 90.00%) and 12% of the loan amount (LTV ratio between 80.01% and 85.00%). Some programs require lower coverage levels which reduces the PMI fee. The table below shows the PMI fee as a percentage of the loan amount based on the maximum required coverage levels.
- PMI fees vary mortgage and lender. Please consult your lender to determine the PMI fees that apply to your mortgage
Source: Genworth (August 2019)
Below we review the requirements for removing PMI from your mortgage. Please note that these guidelines are based on general mortgage industry policies and the requirements for your loan may be different. We recommend that you review your mortgage note -- and specifically the private mortgage insurance rider or addendum -- to understand the specific requirements that you must satisfy to remove PMI from your loan.
Please note that your lender automatically removes PMI when your LTV ratio is 78% based on your scheduled mortgage payments and the value of the property when you obtained your mortgage. This is called cancellable PMI. For example, if you obtained a $90,000 mortgage on a property that was appraised at $100,000 at the time your mortgage closed, the lender automatically removes the PMI when your mortgage balance reaches $78,000 (78% LTV ratio) as you pay down your loan over time according to the original amortization schedule. In this example it takes approximately six years and nine months to reach a 78% LTV ratio (assuming a 30 year fixed rate mortgage).
In all other circumstances, the borrower must request the removal of PMI. Examples of situations where borrowers should request the removal of PMI include:
- A major home renovation or remodeling that significantly increases the value of a property
- Significant property price appreciation in your neighborhood based on recent home sales
- If the borrower overpays, or accelerates, the mortgage which reduces the principal balance faster than the scheduled loan amortization
The required LTV ratio to remove PMI depends on if your removal request is based on the original property value at the time you obtained your mortgage or the current property value as well as how long you have had the mortgage, which is also referred to as "seasoning." For example, if you obtained a mortgage two years ago then the seasoning of the mortgage is two years. With most mortgages, if the seasoning is less than five years the LTV ratio must be 75% to 80%, or less, for PMI to be removed. The lower the required LTV ratio, the more challenging it is to have your PMI cancelled. If the seasoning of the mortgage is greater than five years then LTV ratio must be 80% or less, which means it is easier to cancel the PMI.
If you make a PMI cancellation request based on the original property value at the time your mortgage closed, such as if you accelerated or overpaid your mortgage and paid down your principal loan balance faster than required, the higher (easier) 80% LTV ratio may apply. You can make a PMI cancellation request based on the original property value at any time over the course of your mortgage, even during the first five years of your loan.
Even though the removal request is based on the original property value, the lender is required to verify that the current value of the property is not less than the original appraised value. Depending on what type of mortgage you have and who owns your loan, the lender can verify the current property value using an automated system, an appraisal report or a broker priced opinion (BPO), which is basically a streamlined appraisal provided by a real estate broker. If required, you are responsible for paying for the appraisal report or BPO, although for most PMI removal requests, the cost for these reports is set by standard mortgage guidelines.
Unless your principal loan balance falls below an 80% LTV ratio, usually because you overpaid your mortgage as outlined above, lenders typically do not remove PMI within the first two years of a mortgage, although you may be able to obtain a waiver for the two year mortgage seasoning requirement if you completed significant renovations that increased your property value. In this case you are required to obtain an appraisal report that confirms the new post-renovation property value and meet a 80% LTV ratio requirement based on your current home value.
Please note that a two year seasoning requirement waiver is usually only granted due to an increase in your property value attributable to home improvements or renovations. In other words, if the value of your home increased because home prices in your neighborhood went up, and not because you improved your property, this is not sufficient to qualify for a waiver of the two year seasoning requirement.
If the seasoning of your mortgage is between two and five years and you make a PMI cancellation request based on your current property value, including cases when your property value increased due to favorable real estate market conditions or if you made improvements to your home, the lower (more challenging) 75% LTV ratio requirement usually applies. If your mortgage is seasoned more than five years, the (easier) 80% LTV ratio threshold applies. In both of these cases you are usually required to pay for an appraisal report that confirms the current, higher value of your property. The lender has 30 days after receiving the appraisal to inform the borrower if the request to remove PMI has been approved or denied.
If the appraised property value supports an LTV ratio less than the required LTV threshold, the PMI is cancelled and removed from your monthly payment. If the appraised property value falls below your expectations and the LTV ratio is greater than than the maximum threshold you can request a second appraisal but you are required to pay another appraisal fee. Before you request to have PMI removed, we recommend that you assess the approximate value of your property by contacting a real estate agent or using a property value website. Although you cannot rely solely on the property values provided by these websites, they provide a rough estimation of what your home is worth.
Additionally, in order for PMI to be removed you must be current on the mortgage and not have had a payment over 30 days late within the prior year or over 60 days late within the prior two years.
If you believe that your LTV ratio is lower than the required thresholds outlined above based on your loan seasoning, property value and individual circumstances, then you should contact your loan servicer -- the company to which you make your mortgage payment -- and request to have the PMI removed. The request to remove PMI can be made verbally but we recommend that you send a registered, return receipt letter to your lender. Your letter should include information that supports your request such as property values and comparable home sales in your area as well as your outstanding mortgage balance and estimated LTV ratio. After you receive confirmation that the lender has received your letter follow-up by calling the lender and initiating the process. Lenders delay removing PMI as long as possible so you need to be proactive and assertive.
We should also highlight that only borrower-paid PMI can be removed from a mortgage. You can review your mortgage statement to confirm that the PMI fee is listed as a separate item and that you have borrower-paid PMI. Lender-paid PMI (see below) -- when you pay a higher mortgage rate that includes PMI instead of paying PMI separately -- cannot be removed, regardless of your LTV ratio. Additionally, in most cases you are required to pay mortgage insurance for FHA and USDA home loans for the entirety of the mortgage.
Requesting the removal of PMI can be a time-consuming process and you may be required to pay for an appraisal but canceling PMI can save your a significant amount of money so it is usually worth the effort
Watch our PMI video tutorial to learn more about private mortgage insurance and if you are required to pay it.
Instead of paying PMI on a monthly basis, some borrowers choose to pay a one-time, upfront PMI fee which is also referred to as a single payment or single premium PMI. If you decide to pay for PMI upfront, you do not need to pay PMI on an ongoing monthly basis.
The benefits of single payment PMI include a lower all-in monthly mortgage payment. A lower monthly payment improves your debt-to-income ratio which may enable you to qualify for a higher mortgage amount.
You can pay for single payment PMI out-of-pocket with cash at closing but in many cases you pay a higher mortgage rate and receive a credit -- also known as a rebate -- from the lender to pay for the premium. If you pay a higher mortgage rate, your interest expense increases but because all or part of your mortgage interest is tax deductible, you are effectively able to deduct all or part of the cost of the single payment PMI fee, which is another potential advantage of this approach.
If you are considering using a lender credit to pay for the single payment PMI, we recommend that you compare the payment for a mortgage with a higher rate and no monthly PMI fee to the payment for the mortgage with a lower rate that includes a monthly PMI fee. The comparison allows you to determine if single payment or monthly PMI is the right option for you.
Unlike monthly PMI, you cannot request to have single payment PMI removed or your mortgage rate lowered -- you are stuck paying the rate as long as you have your loan
Please note that if you decide to pay for single payment PMI upfront, you cannot get it refunded, reduced or removed, even if your LTV ratio drops below 80%. So if you are going to own your home for a relatively short period of time, single payment PMI may not make financial sense because you have less time to recover the cost.
Like ongoing monthly PMI, single payment PMI depends on several factors including your credit score and LTV ratio. The table below shows the estimated single payment PMI fee for a $300,000 30 year fixed rate mortgage with various LTV ratios.
PMI fees based on a borrower credit score of 720 - 739. Source: Genworth (June 2018)
It is important to highlight that some lenders may charge a higher mortgage rate instead of charging you PMI separately. This is often referred to as lender paid PMI and works similar to single payment PMI, which we explained above.
In this scenario you are still actually paying PMI but instead of paying for it on a monthly basis, you pay for it with a one-time upfront fee when you mortgage closes. By paying the higher mortgage rate, you receive a credit from the lender which is used to pay the PMI fee. For example, if you choose lender paid PMI, you may be charged a mortgage rate of 4.500% and receive a credit to pay for all or part of your closing costs, including the one-time PMI fee, as compared to being charged a lower rate of 4.250% if you pay monthly PMI separately.
In some cases paying a higher mortgage rate by selecting lender paid PMI can cost more than paying monthly PMI separately because the you pay the higher rate over the life of your loan unless you are able to refinance. For this reason, if you make a down payment of less than 20% and the lender does not specifically require you to pay PMI, be sure to ask if you are paying lender paid PMI and being charged a higher mortgage rate. If the answer is yes, ask what your mortgage rate would be if you paid PMI monthly.
If you pay PMI separately, your mortgage rate should be lower and the monthly PMI fee is removed when your LTV ratio drops below the 78% to 80% threshold. This could save you a significant amount of interest expense over the course of your mortgage.
Sources
"B7-1-02, Mortgage Insurance Coverage Requirements." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.
"B-8.1-04, Termination of Conventional Mortgage Insurance." Selling Guide: Fannie Mae Single Family. Fannie Mae, May 15 2019. Web.
"F-1-02, Escrow, Taxes, Assessments, and Insurance, Ordering Property Values for Mortgage Insurance Termination." Selling Guide: Fannie Mae Single Family. Fannie Mae, December 12 2018. Web.
"Monthly Premium MI (BPMI) — Fixed." Rate Cards. Genworth Mortgage Insurance Corporation, August 5 2019. Web.
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