How to Get Private Mortgage Insurance: A Comprehensive Guide
When buying a home, the process can often feel like navigating a maze. Among the many decisions, one that often perplexes potential homeowners is private mortgage insurance (PMI). If you’re looking to buy a home and can’t afford a 20% down payment, PMI might be a necessity. But what exactly is PMI, and how can you get it? This guide will walk you through everything you need to know about private mortgage insurance—from what it is and why you might need it, to how you can obtain it and eventually eliminate it.
Table of Contents
- What is Private Mortgage Insurance (PMI)?
- Why Do You Need PMI?
- How to Get Private Mortgage Insurance
- Cost of Private Mortgage Insurance
- How to Avoid Paying PMI
- How to Remove PMI
- Conclusion
What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance, commonly known as PMI, is a type of insurance that protects the lender if you, the borrower, default on your mortgage payments. While PMI doesn’t offer protection to you as a homeowner, it plays a crucial role in enabling you to secure a mortgage with a lower down payment—often as low as 3% to 5%.
PMI is typically required by lenders if your down payment is less than 20% of the home's purchase price. The logic is simple: the smaller your down payment, the higher the risk to the lender. PMI mitigates this risk, making it easier for lenders to offer mortgages to buyers who might otherwise struggle to qualify.
Why Do You Need PMI?
The primary reason PMI exists is to protect lenders from the increased risk associated with low down payments. However, PMI also benefits homebuyers. Without PMI, many potential homeowners would find it nearly impossible to purchase a home without first saving up for a significant down payment. PMI enables you to enter the housing market sooner, even if you haven’t yet amassed a large savings cushion.
Additionally, PMI can help you qualify for a loan you might otherwise be denied. Lenders feel more secure lending to buyers who pay less upfront when PMI is in place, because the insurance reduces their potential losses if the loan defaults.
How to Get Private Mortgage Insurance
Obtaining PMI is a relatively straightforward process, but it involves a few key steps and considerations. Here’s a breakdown of how you can secure PMI for your mortgage:
Through Your Lender
Most homebuyers get PMI through their mortgage lender. When you apply for a mortgage and your down payment is less than 20%, your lender will typically arrange PMI on your behalf. The lender works with a private insurance company to provide the coverage, and the cost is added to your monthly mortgage payments.
Lenders usually have preferred PMI providers, which means you might not have a choice in the insurer. However, this route is often the most convenient because the lender handles the entire process, from obtaining quotes to setting up the insurance policy.
Via a Private Insurer
In some cases, you might choose to purchase PMI directly from a private insurer, particularly if you want more control over the insurance provider. This is less common, but it can be a good option if you’re looking to shop around for the best rates. You’ll need to research and compare different PMI providers to find a policy that fits your needs and budget.
Comparing PMI Providers
Whether you go through your lender or choose a private insurer, it’s essential to compare different PMI providers. Look at factors such as the cost of premiums, the insurer’s reputation, and the terms of the policy. Some insurers offer discounts or other incentives, so it’s worth taking the time to explore your options.
Cost of Private Mortgage Insurance
The cost of PMI can vary depending on several factors, including your loan amount, your down payment, and your credit score. On average, PMI premiums range from 0.3% to 1.5% of the original loan amount annually.
For example, if you’re purchasing a home for $300,000 with a 10% down payment, your loan amount would be $270,000. If your PMI rate is 1%, you’d be paying approximately $2,700 annually, or $225 per month.
Lenders typically offer two options for paying PMI:
- Monthly Premiums: This is the most common method, where the PMI premium is added to your monthly mortgage payment.
- Upfront Premium: In some cases, you can pay the entire PMI premium upfront at closing, which might save you money over the long term.
How to Avoid Paying PMI
While PMI is necessary for many homebuyers, there are ways to avoid it. Here are some strategies:
Make a Larger Down Payment: The most straightforward way to avoid PMI is to make a down payment of at least 20% of the home's purchase price. This eliminates the need for PMI altogether.
Consider a Piggyback Loan: A piggyback loan involves taking out a second mortgage to cover part of your down payment, usually 10%. This, combined with a 10% down payment from your own funds, can help you avoid PMI.
Look for Lender-Paid PMI (LPMI): Some lenders offer LPMI, where the lender pays the PMI on your behalf in exchange for a slightly higher interest rate. While this can reduce your upfront costs, it’s important to consider the long-term impact of a higher interest rate.
How to Remove PMI
Once you’ve secured PMI, you’ll likely want to remove it as soon as possible to lower your monthly payments. Here’s how you can do that:
Automatic Termination
Under the Homeowners Protection Act (HPA), lenders are required to automatically terminate PMI once your loan-to-value (LTV) ratio reaches 78%—in other words, when you’ve paid down enough of your mortgage that your remaining loan balance is 78% of the home’s original purchase price. This termination happens without any action required on your part.
Requesting Cancellation
If you don’t want to wait for automatic termination, you can request cancellation of PMI when your LTV reaches 80%. To do this, you’ll need to contact your lender and possibly get a home appraisal to confirm your home’s current value. If your LTV is indeed 80% or lower, your lender is required to cancel PMI.
Refinancing Your Mortgage
Another option to remove PMI is to refinance your mortgage. If your home’s value has increased since you purchased it, refinancing might allow you to qualify for a new loan with an LTV of 80% or less, eliminating the need for PMI. Keep in mind that refinancing comes with its own costs, so you’ll need to weigh the potential savings against the expenses.
Conclusion
Private mortgage insurance is a useful tool for homebuyers who can’t afford a large down payment, but it comes with an added cost. Understanding how PMI works, how to get it, and how to eventually remove it can help you make more informed decisions throughout the home-buying process. By exploring your options and planning strategically, you can minimize the impact of PMI on your finances and achieve your goal of homeownership sooner.
Whether you’re just starting to explore your mortgage options or you’re looking for ways to manage your current loan more effectively, this guide provides the insights you need to navigate the complexities of private mortgage insurance with confidence.
