What is Private Mortgage Insurance (PMI)?

Lenders typically require borrowers to have at least a 20% equity position1 on conventional loans. Private mortgage insurance (PMI) allows borrowers to have a reduced down payment or lower equity in the property being financed. If you do not have 20% in equity or down payment, the lender will require private mortgage insurance (PMI).

PMI insurance is paid by the borrower. The payment is included in the regular house payment.

Advantages of PMI:
The advantage to PMI is that it allows you to make a lower down payment than 20%. As a form of financial leveraging PMI may be a good investment vehicle. In other words, you may get a better rate of return on investments made with the money you could have used for a down payment.

A second advantage is that you may purchase a larger home with a lower down payment. You can purchase a home with as little as 5% down using PMI. With $10,000 you could make a 5% down payment on a $200,000 home or put 20% down on a $50,000 home2.

Additionally, you may be able to purchase a home sooner. If you are finding it difficult to save for a down payment faster than the increase in housing prices, PMI will enable you to stretch the money you have saved by allowing a smaller down payment.

Disadvantages of PMI:
The disadvantage of PMI is the cost. You are required to have PMI included in your monthly payment. The payment amount for PMI is calculated using a variety of factors: loan amount, loan type and percentage of down payment (loan-to-value, LTV). Traditional monthly PMI on a $100,000 thirty-year fixed rate loan with a 10% down payment (sales price of $111,111) will run about $43.33 per month.

Alternatives to PMI:
There are several alternatives to PMI if you are making a down payment of less than 20%. Two of these alternatives are piggyback loans and lender insured loans.

(1) value is determined using the lesser of the purchase price or appraised value
(2) downpayment is exclusive of closing costs, prepaid items, and required reserves, if any

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How do I cancel the PMI on my loan?

PMI can be removed from a loan under certain circumstances:

Situation 1
PMI may be canceled at the borrower’s request if:
  • The loan balance has been amortized down to 80% of the original value (lower of the original sales price or appraised value); and
  • The payment history has been satisfactory; and
  • There are no subordinate liens on the property.

Write to the current loan servicer requesting that the PMI be cancelled. The loan servicer must act on the request within 30 days of receipt of the request.

Situation 2
PMI may be cancelled due to home appreciation and the build-up of equity. This may be an option if:
  • An appraisal is performed by an appraiser approved by the loan servicer (the borrower is responsible for the appraisal cost); and
  • The current appraised value demonstrates a 75% to 80% equity position; and
  • A satisfactory payment history has been maintained for 24 months (or there have been improvements to the property).

The best approach in this situation is to contact the current loan servicer and request the specific guidelines to cancel PMI.

Situation 3
The loan servicer will automatically cancel PMI unless the loan has been classified as a high-risk loan if:
  • The loan balance has been amortized down to 78% of the original value; and
  • The payment history has been satisfactory.
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