What is PMI on a Mortgage?

PMI primarily protects the lender should the borrower stop making payments on a conventional loan. But what many forget is it also gives homebuyers the ability to purchase a home without saving 20 percent for a down payment.

What does PMI Mean / stand for?

PMI means Private Mortgage Insurance.

WHen IS PMI Required?

  • PMI may be required for conventional loans that have a down payment of less than 20 percent.
  • In certain instances, Private Mortgage Insurance may also be required with conventional loan refinances.
  • PMI is required when the equity in the property you are refinancing is less than 20 percent of the home value.

You can avoid PMI with lower than 20 percent down payments by splitting the loan into an 80 percent first lien and an 10-15 percent second lien* on a conventional loan.

You can also use this first and second lien option to split up a jumbo loan as well, which allows you to pay conforming interest rates with a first lien loan amount of up to $625,000 and a second lien of 5-15 percent. The interest rate on the second lien will be higher than the first lien rate should you choose this option.

Your loan officer can help you understand your options between Conventional Conforming and Jumbo loans as well FHA and VA loans. Your LO will also be able to explain how your down payment, PMI, mortgage insurance premium (MIP), or funding fee will affect your monthly payment.

*Note: Get a Rate, llc. does not originate second liens. The second lien will be facilitated by Get a Rate, llc. with an outside lender.

How much does PMI Cost?

PMI and MIP monthly costs vary and can range anywhere from .43 to 5.96 percent of the loan amount for fixed rate mortgages depending on how you choose to pay it.

The amount each homebuyer ultimately pays in the end for PMI depends on things like credit score, Loan-to-Value ratio, mortgage type and down payment amount. MIP is required on all FHA loans and is typically 1.75% of the loan amount for up-front MIP that can be paid at closing or rolled into the loan amount.

Also, an additional .85 percent of the loan amount (divided by 12 months) will equal your monthly MIP amount that will be added to your monthly payment.

How DO I Calculate PMI on a Conventional Mortgage?

You can calculate your Private Mortgage Insurance by taking the insurance rate (which is calculated using the lower of all borrower’s middle credit score), down payment, and loan type on conventional loans and multiplying this rate by your total loan amount and then dividing that by 12 months.

Please contact your loan officer if you have any questions.

What is MIP on a Mortgage?

MIP means Mortgage Insurance Premium and it’s required on all FHA loans. You will be required to pay up-front MIP at closing or roll it into your loan.

FHA loans also require a non-cancelable monthly MIP premium.

With larger down payments, the monthly MIP may be canceled at some future point. The benefit of an FHA loan is that it may be a great option for borrowers with lower credit scores or little credit with a smaller down payment.

The minimum down payment on an FHA loan is 3.5 percent of the lesser of the sales price or appraised value.

The Lack of accuracy of Mortgage Calculators with No PMI

Please use caution if you are using online mortgage calculators. If you use one, you need to know the monthly PMI, MIP rate or monthly payment that may be required on your loan (this depends on your down payment and loan type).

A Mortgage Insurance Premium (MIP) is required on all FHA loans. To calculate your total Principal Interest Taxes and Insurance (PITI) correctly PMI may be required on conventional loans with less than a 20% down payment. All FHA loans require up-front and monthly MIP.

If an online calculator does not include PMI or MIP, it will not show you an accurate picture of your total monthly payment.

Call your loan officer to verify the monthly PMI or monthly MIP payment that may be required on your loan. If you are choosing to go with a VA loan you do not need to worry as you will not have a monthly PMI or MIP payment.

How To Read PMI or MIP on a Mortgage Statement

The cost of your Private Mortgage Insurance or MIP is found in the “Explanation of amount due” section of your mortgage statement and is included in your escrow payment (which goes to your escrow account).

Your escrow account pays your PMI, Homeowner’s/Hazard Insurance, and Property Taxes annually if it is required. Your Homeowners Association dues for living in a HOA will be paid by you and may be billed by your Homeowner’s Association monthly, quarterly, or annually.

HOA Dues are not included or paid from your escrow account.

How to avoid paying PMI on a Mortgage

If you want to avoid getting PMI on a conventional loan altogether, here are a few options.

Put down a 20 percent down payment on a conventional loan

Not everyone can afford this option but have no fear, there are still additional ways you can avoid paying PMI.

Pick a VA Loan if you are eligible

Since VA loans do not require monthly PMI or down payments this is probably the best option for veterans, active-duty service members and their spouses. VA loans do have an up-front VA Funding fee that can be rolled into the loan.  Some veterans are exempt from paying a funding fee.

Pick an 80/10/10 or 80/15/5 conventional loan

This is also known as a Piggyback loan. This type of loan is beneficial for borrowers with less than 20 percent down and geared towards borrowers with good credit. A Piggyback loan, for example, may be an 80 percent first lien and a5-15 percent second lien* to avoid PMI. The second lien rate is higher than the first lien interest rate. Your loan officer will show you options with PMI or without it for conventional loans. FHA and VA loans do not offer Piggyback loans.

*Note: Get a Rate, llc. does not originate second liens. The second lien will be facilitated by Get a Rate, llc. with an outside lender.

How to stop paying PMI

A straightforward way to stop paying for private mortgage insurance is to attain 20% equity in your homebased on a new appraisal.

After reaching this point you can formally submit a request to your lender to cancel your PMI.

A home appraisal may be necessary to demonstrate your 20% equity. Do not order a home appraisal yourself because the lender will not use it, it’s best to let them order it. These can cost anywhere from $450 to $2,200 based on the square footage of your home and these amounts are subject to change.

If you can’t convince your lender to drop your PMI, another step you could take is to refinance your mortgage with a lender that is not currently servicing your mortgage and they will use the new appraised value based on a new appraisal.

Please note that all requests to cancel PMI must be in writing and approved by your lender. The good news is that once your loan-to-value ratio becomes 78% of the original value on a conventional loan, the PMI is automatically cancelled.

If you choose an FHA loan, your monthly MIP or Mortgage Insurance Premium will not be cancelled for the life of the FHA loan (the exception is with higher down payments).

You could refinance your FHA loan to a conventional mortgage if the PMI is significantly lower based on your equity or if your home value or equity is 20% or more based on an appraisal.

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