Private mortgage insurance (PMI) is a type of mortgage insurance for that protects the lender in case you default on your mortgage. Home buyers who make a down payment of less than 20% will be required to purchase PMI as a condition of the loan.
Requiring PMI allows lenders to offer mortgages to home buyers with limited cash reserves. If you are required to purchase PMI, your mortgage lender will set up the insurance with a private insurer.
Here’s more on what you need to know about private mortgage insurance, including how much it costs, how long you have to pay it, and how to avoid it.
How much is private mortgage insurance?
Most borrowers pay the added cost of PMI with their monthly mortgage payment. According to , monthly premiums for PMI generally range from $30 to $70 for every $100,000 you borrow. Your exact rate and monthly payment will vary depending on the size of your and your .
Here’s an example of how much you could expect to pay for PMI premiums depending on the size of your down payment. Assume you are purchasing a $350,000 home with a 30-year mortgage with a fixed rate of 7%.
How long do I have to pay PMI?
The good news about PMI is that you are not locked into it for the entire life of the loan. Below are three ways your PMI may be canceled — which will lower your monthly payment.
When your principal balance reaches 80%
Borrowers have the right to request PMI cancellation once the principal balance remaining on the mortgage has reached 80% of the home’s original value.
The law requires your lender to cancel your PMI upon reaching the 80% principal balance as long as you meet these requirements:
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You request the cancellation of PMI in writing.
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You are current on your mortgage payments and have maintained a history of on-time payments.
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You do not have any second mortgages on the property.
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Your home’s current value is not less than its original value.
When your principal balance reaches 78%
Though you must specifically request the cancellation of your PMI at the 80% principal balance milestone, your lender will automatically cancel your private mortgage insurance once your principal balance reaches 78% of the original home value.
This cancellation is automatic, but it may not go through if you are not current on your mortgage payments.
When you are halfway through your loan term
Reaching the halfway point of your mortgage repayment term — whether or not your principal balance has reached 78% of the original home value — will also automatically trigger the cancellation of your PMI. For a 30-year mortgage, this means your PMI will be canceled when you reach year 15, even if you still owe more than 78% of the home’s value.
Borrowers must be current on their mortgage payments for this automatic cancellation to occur.
How do I avoid PMI?
The simplest way to avoid paying PMI is to put down at least 20% on a conventional loan.
However, if you are not able to afford a 20% down payment, here are some other ways to avoid paying PMI:
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Piggyback mortgage: You put down 10%, take a conventional mortgage for 80%, and add a second mortgage, called a piggyback mortgage, for the remaining 10%. The piggyback mortgage will usually be a, and it will have a higher interest rate than the primary mortgage — but it will allow you to avoid PMI on your primary loan.
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Lender-paid mortgage insurance: Some lenders will cover the cost of your private mortgage insurance in exchange for a higher interest rate.
Tip: While you won’t pay private mortgage insurance on any government-backed loans, charge their own mortgage insurance, the charges an upfront and ongoing fee, and the charges an upfront fee.