Everything You Need to Know about Private Mortgage Insurance (PMI)

Private mortgage insurance or PMI isn’t something homebuyers get excited about. However, if it wasn’t available, many potential homebuyers wouldn’t have the option to buy a home.

It will make your home payments higher and it doesn’t do anything to protect the homeowner. PMI is a necessary part of the mortgage process for those putting less than 20% of the purchase price down on the home.

Some loans, such as those designed for medical professionals and physicians that will waive the PMI requirement if less than 20% is put down on the home. Here’s a look at how PMI works with different types of loans.

Conventional Loans

While you may have to start out with PMI when you take out a conventional loan, this type of loan will cancel the PMI when you have 20% equity in your home. In fact, the Homeowner’s Protection Act of 1998 forces lenders to terminate the PMI when the loan reaches a 78% loan-to-value ratio.

Cancellation has to be initiated by you, however. This law is based on the date your loan is supposed to reach 78%, which you can find on the initial amortization schedule.

FHA Loans

A very popular loan program for first-time homebuyers, the FHA-backed loan requires mortgage insurance. It’s known as mortgage insurance premium or MIP, however.

If you took out your FHA loan before June of 2013, you can get rid of MIP when you reach 22% equity in your home, on a 15-year note.

More recent FHA loans require you to keep the MIP for life if you put down 10% or less and take out a term of 20, 25 or 30 years. Those putting down more than 10% can cancel the MIP after 11 years.

USDA and VA Loans

Those qualifying for a USDA loan will be required to pay an annual fee instead of PMI. These are usually no money down type of loans, so the PMI would probably be very high, if you had to pay it.

VA loans are guaranteed by the U.S. Department of Veterans Affairs. You can even get a non-down payment option and none of the VA loans require PMI.

How to Avoid PMI on Your Mortgage

If you don’t qualify for one of the loan programs not requiring PMI and you cannot put 20% down, you’re not stuck with PMI. There are ways to get out of paying for private mortgage insurance including:

• A Buy-Out – Some lenders will allow you to buy out of PMI by paying a bit higher interest rate. Usually, you have to have good credit to make this an option.
• Piggy-Back Mortgage Loan – You can avoid PMI with a Piggy-Back mortgage loan. This type of loan includes a 10% down payment, a first mortgage for 80% and another second mortgage for 10% to cover the rest of the down payment.
• Refinance – Once you have enough equity in the home, you can dump PMI by refinancing the loan.
• Get an Appraisal – If you believe your home has gone up in value and you now have 20% or more in equity, have it appraised. Some lenders will take an appraisal to cancel PMI.
• Pay down your Loan Faster – If you pay a little extra each month, it will bring your balance down and get you closer to canceling PMI sooner.
• Remodel to Increase Value – Some remodeling projects will help you increase the value of your home, which could get you to the 20% equity faster.

There are several ways to get out of paying PMI and you don’t have to be stuck with it for the life of the loan. Make sure you understand how private mortgage insurance works before you buy and have a plan in place to eliminate it.