Private Mortgage Insurance (PMI)
What it is, why it exists, and how to get rid of it.
If you buy a home with less than a 20% down payment, the lender views you as a higher risk. To offset that risk, they require you to pay for Mortgage Insurance. It's important to understand: PMI protects the lender, not you. If you default on the loan, the insurance pays the lender.
How much does it cost?
PMI is generally calculated as a percentage of the loan amount, ranging from 0.3% to 1.5% annually, divided into 12 monthly payments.
For a $300,000 loan at a 0.75% PMI rate, you would pay $2,250 a year, or $187 extra every month. The rate depends heavily on your credit score and your down payment amount (PMI on a 5% down loan is cheaper than on a 3% down loan).
How to get rid of PMI
The rules for dropping mortgage insurance depend entirely on the type of loan you have.
Conventional Loans
PMI automatically cancels when your loan balance naturally amortizes down to 78% of the original purchase price. However, if your home goes up in value, you can request an appraisal to prove you have 20% equity and petition the lender to drop it early.
FHA Loans (MIP)
FHA calls it MIP. If you put down less than 10%, the MIP is permanent for the life of the loan. It never drops off, regardless of equity. The only way to remove it is to refinance into a Conventional loan.
VA Loans
VA loans never have monthly mortgage insurance, even with 0% down.