Understanding Private Mortgage Insurance

There’s an important number when it comes to home loans: 20%. This is typically the down payment you’ll need to cover to get what’s called a “conventional” mortgage to buy a home. The bank loans you the other 80% of the home’s price, and you pay back that loan over a long period of time (usually 15 or 30 years) This arrangement works great in theory, however the median sale price for an existing home in the U.S. was $404,500 in September 2024, according to the National Association of Realtors (NAR). That means a 20% down payment on the average home is now more than $80,000!

For first-time home buyers especially, who can’t obtain the cash by just selling their previous home, it can be more or less impossible to save up that much cash. That’s why there are loan programs (such as FHA mortgages and HomeReady mortgages, among others) that drastically reduce the down payment required, bringing it down to as little as 3.5.%

Conventional loan programs offering a lower down payment come with a bit of a catch, however - the need for PMI, or Private Mortgage Insurance. PMI is an insurance policy that covers the lender in case the borrower defaults on their mortgage. Without this kind of insurance policy, lenders wouldn’t be able to take the risk of offering mortgages with a lower down payment, and buying a home would be even harder than it already is for first-timers!

How Private Mortgage Insurance Works

Just like any other insurance policy, PMI premiums are paid regularly for as long as the policy is active. Borrowers pay this premium, it’s simply added to your monthly mortgage payment by your lender. The monthly cost of PMI varies depending on factors such as the amount of the loan, the type of mortgage you get, and your credit score.

Important note - PMI is different from your homeowners insurance! Your homeowners insurance protects you if something happens to your home, PMI protects your lender from the risks of default or foreclosure.

You’ll pay this monthly PMI expense as part of your mortgage payment, until you’re eventually able to cancel the PMI policy once you’ve paid down enough of the principal balance of your loan. The rules that determine when you can cancel the PMI policy on your mortgage are dictated by a federal law called the Homeowners Protection Act of 1998 (HPA), also known as the PMI Cancellation Act.

Once the amount you owe on your mortgage reaches one the following thresholds, you can start looking into ways to cancel your PMI policy:

• 80% of either the appraised value or purchase price (whichever is lower) of your home on purchase transactions, or

• 80% of the most recently appraised value of your home on refinance transactions.

This ratio of what you still owe on your home versus what your home is worth  is known as your mortgage’s loan-to-value, or LTV.

Reaching the 80% LTV threshold can happen one of two ways: First, as you make your monthly payments, the principal balance on your mortgage will slowly go down. After making your payments for at least 11 years, you are able to request that your lender review your loan to see if it qualifies for PMI removal. As long as your LTV has dropped below 80% and you have a good payment history, the PMI premiums can be removed from your monthly mortgage payment.

Alternatively, your home might increase in value enough to bring your LTV to under 80% a lot sooner than would naturally happen from making your normal mortgage payments. You can of course just refinance your existing loan into a conventional one to get rid of PMI (and be aware, part of the refinance process involves getting a new appraisal for your home, to confirm the new mortgage will be for less than 80% of the home’s value) 

Depending on your specific type of mortgage loan, you may also be able to request that your lender remove the private mortgage insurance requirement from your existing loan, without the need to refinance. This option will only work if you believe the value of your home has increased quite a bit since you purchased it. In any case, you’ll need to wait at least two years to pursue this option per Fannie Mae’s seasoning guidelines.

The PMI Saver Loan - A Cheat Code to Avoid PMI!

Another great option for those who can afford a little more than the 3.5% minimum down payment of an FHA loan, but can’t afford a whole 20% down payment, is our PMI Saver Loan. With this product you’ll just need to make a 10% down payment, and then we’ll pay your PMI premiums for you. 

If that sounds too good to be true, it’s not! Lender-paid PMI loans like our PMI Saver mortgage are an option offered by particularly awesome lenders such as Mortgage Center. In exchange for paying a slightly higher interest rate on your mortgage, you can cut your down payment requirement in half while still avoiding the monthly costs associated with PMI. 

This isn’t just a great option for purchasing a new home, the PMI Saver loan is also an excellent way to tap even more of your home’s equity when doing a cash-out refinance. While a conventional cash-out refinance mortgage amount is limited to 80% of your home’s current value, the PMI Saver loan allows you to take out a loan for up to 90% of your home’s value instead while still avoiding PMI. 

If you have any other questions regarding private mortgage insurance, give us a call today at 800-353-4449 to speak to one of our friendly loan experts. If you’d prefer to speak with us via email or to set up a call later, fill out this form to request a quick consultation with a loan officer and we’ll reach out to you shortly. There’s no obligation, we’re just here to help with any questions about PMI (or anything else!) that you might have.