Private Mortgage Insurance (PMI) is a type of insurance that protects lenders in case a borrower defaults on their home loan. For many homebuyers, especially those who cannot put down a large initial payment, PMI becomes a necessary part of the mortgage process. This guide explains everything you need to know about getting PMI, from when it’s required to how to remove it.

What Is Private Mortgage Insurance (PMI)?

PMI is typically required when a homebuyer makes a down payment of less than 20% of the home’s purchase price. It allows individuals to purchase homes with a smaller down payment, reducing the risk for the lender by insuring the loan against default.

Why Do You Need PMI?

Lenders require PMI to mitigate the risk associated with lower down payments. If you default on the loan, the lender is compensated through the insurance. This reduces the risk of financial loss for lenders while still allowing you to purchase a home without a 20% down payment.

How to Get Private Mortgage Insurance

Obtaining PMI is usually part of the mortgage application process. Here are the key steps to getting PMI:

1. Shop for a Mortgage

Before you think about PMI, you need to find a mortgage lender. Many lenders will automatically include PMI in the loan offer if your down payment is less than 20%. Compare different lenders to find the best mortgage rates and PMI options.

2. Understand Your Down Payment

PMI is required if your down payment is less than 20% of the home’s value. The lower your down payment, the higher your PMI costs are likely to be. Make sure to calculate how much you can afford to put down upfront.

3. Choose a Loan Type

There are different types of mortgage loans, including conventional loans, FHA loans, and VA loans. PMI applies mainly to conventional loans. If you’re using a government-backed loan like an FHA loan, you may be required to pay a different type of mortgage insurance premium.

4. Get Pre-Approved for a Loan

Getting pre-approved for a loan helps you understand how much you can borrow and what your PMI costs might be. During pre-approval, the lender will assess your credit score, income, and financial history. If your down payment is less than 20%, the lender will inform you about the required PMI.

5. Consider the Cost of PMI

PMI costs vary depending on the loan amount, down payment, and credit score. Typically, PMI costs between 0.3% and 1.5% of the loan amount annually. These payments are added to your monthly mortgage bill. For example, on a $200,000 loan with a 1% PMI rate, you’d pay about $167 per month for PMI.

6. Finalize Your Loan and PMI

Once you finalize your mortgage loan, the lender will include the PMI in your loan documentation. The cost will be included in your monthly mortgage payment. Make sure you review all documents to understand how much you’re paying for PMI and when it will end.

Ways to Avoid or Minimize PMI

While PMI is a necessity for many homebuyers, there are ways to avoid or minimize it:

1. Increase Your Down Payment

If you can afford to make a 20% down payment, you can avoid PMI altogether. Even increasing your down payment to 10-15% may lower the amount you need to pay for PMI.

2. Improve Your Credit Score

Lenders determine your PMI rate based on your credit score. A higher credit score can lead to lower PMI premiums. Work on improving your credit by paying down debt and making timely payments on existing loans.

3. Consider a Piggyback Loan

A piggyback loan, also known as an 80-10-10 loan, allows you to avoid PMI by taking out a second loan. The first loan covers 80% of the home’s value, the second loan covers 10%, and your down payment covers the remaining 10%. This strategy avoids PMI but comes with its own costs and risks.

4. Look Into Lender-Paid PMI

Some lenders offer an option where they pay the PMI upfront, and you pay a higher interest rate on the loan. This can be an option if you want to avoid monthly PMI payments, but you’ll end up paying more over the life of the loan.

How to Remove PMI

You don’t have to pay PMI for the entire life of your loan. There are ways to remove PMI once you’ve built up enough equity in your home:

1. Automatic Cancellation

PMI is automatically canceled once your loan balance reaches 78% of the original home value. This happens as you pay down the loan principal over time.

2. Request Cancellation

You can request to cancel PMI once your loan balance reaches 80% of the home’s original value. You will need to contact your lender and may be required to get a new appraisal to confirm the home’s value.

3. Refinance Your Mortgage

If your home has appreciated in value, you may be able to refinance to a new loan with a lower loan-to-value (LTV) ratio. Refinancing may help you eliminate PMI if your new loan balance is less than 80% of the home’s value.

Conclusion

Private Mortgage Insurance can be an essential part of securing a home loan with a low down payment. While it adds to your monthly expenses, PMI allows many homebuyers to achieve their dream of homeownership sooner. Understanding how PMI works, how to minimize it, and how to remove it can help you make informed financial decisions and potentially save money in the long run.

By following the steps above, you can secure PMI and ensure that you are fully prepared for the responsibilities that come with it.