Avoiding Private Mortgage Insurance
You may be paying an extra $100 or more per month on your mortgage payment, but you might not have to.
That extra amount could be going toward Private Mortgage Insurance (PMI), which is required by lenders if you purchase a home with less than 20% down.
This insurance protects the mortgage lender in case you default and don’t pay the mortgage, but they don’t pay the premiums—you do. PMI costs around 1% of total loan amount. So if you have a typical mortgage of around $172,000, you might pay an extra $143.00 per month for PMI costs. (1% of 172,000 is $1,720, divided by 12 monthly payments = $143.00.)
This cost might be easier to bear if you actually got anything for your money, but you don’t. Again, the insurance you’re paying doesn’t protect you at all—the only benefit you get from the expense of PMI is that it allows you to get a mortgage when you can’t afford to put 20% or more down.
The best way to avoid having to pay for Private Mortgage Insurance is to put 20% or more down when you initially get your loan. As long as you only owe 80% or less of your home’s value toward the mortgage, you aren’t required to have PMI.
There are other ways to avoid PMI if you can’t put 20% down, but they can be risky. Lenders offer “piggyback” loans, where an extra loan is taken out to pay the original mortgage loan down to 80% of the home’s value. So a borrower might borrow 80% of the home’s value with one loan, 10% of the value through another loan, and put 10% down. This “80/10/10” arrangement allows a borrower to avoid PMI on the mortgage loan, but results in an additional 10% loan that must be repaid. Repaying this loan carries risks (these loans may have adjustable rates, for example) but it’s probably going to be cheaper than paying for PMI on a 90% loan.
By law, lenders must cancel PMI charges automatically when the loan gets below 78% of the home’s initial value. But technically, you should be able to get it canceled when you’ve paid down the mortgage to 80% of the home’s current value.
That means you’ll have to do some extra work—you will need to submit written requests to cancel PMI and have the home’s current value appraised. All of this extra work is worth it if you think your loan is only 80% or less than your home’s current value. And with home values beginning to rise again, you may want to investigate whether your home’s value has risen enough to get out of the expense of PMI.
When you can’t terminate PMI
Some lenders have rules that may prevent you from terminating PMI. Your lender may not be obligated to cancel PMI for you if you meet certain conditions:
• you have had late payments in the past year or two,
• you no longer live in the home, or
• you have a home equity loan against the property.
If you have questions about PMI and whether terminating PMI is an option for you, a nonprofit housing counselor can answer your questions. Call us for free assistance from a HUD-approved housing counselor. We can answer your questions about PMI or any other issues you may be having with your home loan.