All about Private Mortgage Insurance – PMI
Unless you are able to put 20% down on a conventional, non-government loan, Private Mortgage Insurance, or PMI, is required. PMI is insurance written by a private company that protects the lender from losses if a borrower defaults or is unable to repay the loan. The PMI is a monthly payment that is added to your monthly payment. It can range from .25% – 1.6% of the loan amount per year (but paid on a monthly basis). The amount you will pay is “risk based” meaning it depends on how much you put down, as well as, your decision credit score. The greater the down payment, in 5% increments (5%, 10%, 15%), the lower the monthly PMI payment.
How to avoid monthly PMI payments
Make a 20% Down Payment
Any loan with 20% down will not be required to have private mortgage insurance.
Lender PMI (LPMI)
By raising the interest rate slightly, your lender will pay the mortgage insurance policy premium for you. In this way there will be no monthly PMI payment on your loan. Although the interest rate is higher, the monthly payment is often lower. Again your decision credit score will determine if you qualify for LPMI and at what interest rate. Note that this strategy requires careful consideration and is not the best choice for everyone, but it is worth considering.
Single Premium PMI
Paying a single lump sum premium upfront at closing for your private mortgage insurance, eliminates the monthly premium and can be a great deal under the right circumstances. The cost of the single premium is much less that the total cost of the monthly PMI payments that would be required. You must have a high enough score to qualify for single premium PMI.
How long do I have to pay PMI?
There is a lot of confusion as to how PMI can be cancelled from a loan.
The law states that PMI on all agency loans must be cancelled when the loan balance reaches 78% of the lower of the original appraised value of the property or the original purchase price based on the original amortization schedule.
You may request that your lender remove it when the balance reaches 80%, but certain conditions have to be met. At the time you make your request, you cannot have a second mortgage on the property, and there should be no 30 day lates on your mortgage within the previous 24 months. The lender may order an appraisal at your cost to confirm that the property has not lost value.
You can no longer present your lender with a new appraisal showing that the value has increased to the point where your equity is now 20% or greater and expect them to drop your PMI.
However, it depends on the lender who owns your mortgage, as well as your loan servicer if they wish to cancel your PMI earlier. We have known some lenders to cancel PMI when a very large payment is made against the principle balance of the loan bring the balance less that 80%. Be aware that some lenders may still require PMI for at lease 5 years from the date of your first payment.
Many of our clients who have refinanced in recent years to lower their interest rate have also eliminated their PMI in the process. If your home has increased in value as evidenced by a new appraisal, your new loan may show enough equity so that PMI is no longer required. If it is still required, LPMI or single premium PMI may be a better choice now.
First Nations Home Mortgage works very hard for their clients to eliminate PMI or to reduce its costs. Call us today to discuss your options!