Everything You Need to Know About Private Mortgage Insurance

Before you begin searching for a home, you should take stock of your financial position and understand how much house you can afford and the different requirements for loan eligibility. Part of that consideration includes how much of a down payment you can manage. Generally speaking, the more you can put down on your house, the better. But not everyone can afford a large down payment, and some buyers struggle with less-than-ideal credit scores. 

While there are home loans available that don’t require a traditional 20% down payment, if you’re unable to put down a large amount down or don’t have a top-tier credit score, you may be saddled with an extra payment in your mortgage called private mortgage insurance, or PMI. The amount of the extra payment varies depending on your loan circumstances.

What Is PMI and How Does it Work? 

PMI stands for “private mortgage insurance” and means the backer(s) of the loan want additional money to protect their institution against default. It’s a way of saying, “We’ll lend you the money for a home without a big down payment, but we want extra protection in case you can’t make the payments.” PMI premiums are common in certain government-backed loans, such as an FHA loan, which can only be offered by certain lenders, such as Financial Concepts Mortgage, that are approved by the Department of Housing and Urban Development (HUD). FHA loans have more stringent qualifications than conventional loans, such as requiring that the home meet certain safety, security, and structural integrity guidelines. FHA loans do offer many benefits, however, including a lower requirement down payment and the inclusion of closing costs in the loan.  

The bad news is that if you don’t put down the minimum required down payment, you’ll have to pay the additional PMI payment as part of your monthly homeowner costs for many years, possibly for the entire life of your mortgage loan. So in addition to your mortgage principal, interest, property taxes, and homeowner’s insurance, you have PMI rolled in as well. The cost of PMI isn’t fixed and can range from a few dollars a month to a few hundred, depending on your particular circumstances. 

Though it’s hard to see why paying more money is beneficial, PMI has been helpful for many homebuyers who can’t afford conventional loans with a large, 20% (or more) required down payment. With alternative loan options and PMI to give the lender more assurance about loaning this large amount of money to the buyer, more homebuyers can own homes with a smaller down payment.  

In some cases, such as loans where the buyer can’t even manage a 10% down payment, or in cases where the buyer has a complicated credit history, you may be required to pay PMI for the entire life of the loan. In other cases, once you have built up enough equity in the home (generally 20%), you may be able to get PMI removed from your mortgage. 

How to Have PMI Removed from Your Mortgage 

A good lender will go over every detail of the home loan process with you. You should always know upfront what types of loans you are eligible for, how much you could be paying, how the payment breaks down, and how long you will be paying. If your loan will include PMI, they should explain how much it will be and how long you’ll be expected to pay it. However, in many cases, as you build equity in your home and make your monthly payments on time, PMI can eventually be removed from your mortgage. For many qualifying loans, once you have reached the point of 20% equity in your home, you can contact your mortgage lender to have PMI removed. In some cases, it will come off automatically after a certain amount of equity is reached. But, if you can have it removed sooner by contacting your lender proactively, definitely make a note of the date you are eligible to stop paying PMI so that you aren’t paying it any longer than necessary. 

Refinancing and PMI 

Let’s say mortgage rates have dropped and you want to refinance for that lower rate. Advertisements of low rates are attractive, but the process is more complicated than calling a number on your TV or a billboard. Just like when you applied for the original mortgage loan, refinancing requires certain qualifications to be met, such as a particular amount of equity in your home and a good credit score.  

Your lender should go over all the details with you so you fully understand all of your available refinance options and how your payment might change if you refinance, especially with regard to PMI. If you don’t have enough equity built up yet in your home, you might have to start paying PMI when you weren’t with your existing loan, making your payment more expensive. Even with lower interest rates, your payment could end up increasing.  

The best way to find out if you can and should refinance your home, what options are available, and whether or not you will need to start or to continue paying PMI is to contact a mortgage lender.