What Is Mortgage Insurance?

What Is Mortgage Insurance?

  • Trevor Wissink-Adams
  • 10/23/20
Mortgage insurance reimburses the lender if borrowers default on their loan. Mortgage insurance requirements vary based on the loan type, but typically is charged to borrowers who put down less than a 20% down payment on a home.

About Private Mortgage Insurance (PMI)

PMI is required for conventional loans with less than a 20% down payment (unless a second loan is secured to reach the 20% threshold). A conventional loan is any type of home loan that is not offered or secured by a government entity, like the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA). Conventional loans are available through or guaranteed by a private lender or the two government-sponsored enterprises (Fannie Mae and Freddie Mac).

PMI is based on the loan size, with lower rates for higher down payments. PMI is generally between $30 and $70 a month for every $100,000 of the loan amount.

How Do You Cancel PMI?

  • Wait for It to End. If you are current on your mortgage payments, PMI will automatically terminate when your principal balance is 78 percent of the original home value, which means you have 22 percent equity in your house.

  • Make Additional Payments. On a 30-year mortgage with 10% down, you will cross the 80% loan-to-value threshold in about seven years if you make the minimum monthly payments. Any extra payments you make will allow you to pay off the loan more quickly.

  • Get a Home Appraisal. A home appraisal determines your home’s current market value. The combination of your increased equity in the house over time and its change in market value could lead to a lower loan-to-value ratio.

  • Refinance Your Mortgage. If mortgage rates have dropped since you bought your house, refinancing might result in a lower loan to value ration. But refinancing has costs that need to be factored into any decision.

How Common Is  PMI?

In the past 7 years, the percent of loans with PMI has increased from approximately 30% to just over 36%. In 2019, 13% of all buyers financed 100% of the loan amount according to data from the National Association of Realtors. For buyers ages 22 to 29, 64% financed over 90% of the loan amount, requiring PMI or another type of mortgage insurance with most lenders.

Should You Wait To Buy Until You Can Avoid Mortgage Insurance?

As you consider your own personal situation, here are three things to consider as you tackle the question above:
    1. Home prices // If you live in an area where home prices are on the rise, paying mortgage insurance may make better financial sense than waiting a year when home prices could be higher.

    2. Your credit score // For borrowers with strong credit, PMI is a less scary proposition as they are typically offered more favorable interest rates and as a result a lower monthly payment.

    3. Mortgage interest rates // A 0.5% - 1% change in your mortgage interest rate could save you tens of thousands of dollars over the life of a loan. Calculate the amount you would pay for mortgage insurance. It may be that paying mortgage interest is better than waiting a year or two, when mortgage rates could go up. Conversely, when interest rates are high, it can be worth waiting.

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