If you make a down payment of less than 20% when you buy a home, lenders typically require the borrower to purchase private mortgage insurance, which is also known as PMI. PMI is insurance against loss from mortgage default provided to the lender by a private insurance company. In other words, the borrower pays for an insurance policy that protects the lender in case you cannot pay your mortgage. Please note that PMI does not protect the borrower if you fail to pay your mortgage or lose your home to foreclosure. PMI typically requires the borrower to pay an ongoing monthly fee when you make your mortgage payment or a one-time upfront fee, which is relatively uncommon.
The borrower is only required to pay PMI as long as the loan-to-value (LTV) ratio is greater than the lender's maximum LTV threshold which is 75% - 80%, depending on when you make the cancellation request and if your cancellation request is based on your original property value at the time your mortgage closed or your current property value. The LTV ratio represents the ratio of the mortgage amount to the fair market value of the property and is inversely related to the down payment the borrower makes. For example, if the borrower makes a 5.0% down payment, the LTV ratio is 95.0% and if the borrower makes a 15.0% down payment the LTV ratio is 85.0%. The LTV ratio decreases as the borrower pays down the mortgage balance over time or if the property value increases. The borrower can request to have the PMI fee cancelled when he or she believes the LTV ratio is below the maximum threshold.
PMI rates vary depending on several factors including:
If you are required to pay PMI, borrowers typically select the ongoing fee option, which is an extra monthly payment on top of your mortgage payment. For a conventional loan, if you decide to pay for PMI on an ongoing monthly basis, you do not pay a one-time upfront PMI fee. As outlined in the table below, the ongoing PMI fee depends on many factors including your credit score and LTV ratio. It is important to highlight that the ongoing PMI is based on your mortgage balance at the beginning of the year, not your original loan amount, so it declines over time as you pay down your loan.
The table below shows the ongoing PMI fees for a thirty year fixed rate mortgage, as a percentage of the loan amount. The table demonstrates how ongoing PMI fees vary by LTV ratio and credit score with higher credit scores and lower LTV ratios having lower PMI rates. For example, according to the PMI pricing table below, a borrower with a 700 credit score and 97% LTV ratio pays an ongoing PMI fee of .99% of the loan amount. if your mortgage balance is $100,000 and the ongoing PMI fee is .99%, then your monthly PMI fee is $82.50 ($100,000 * 1.115% = $990 / 12 months = $82.50 per month).
Please note that the table below shows the ongoing PMI fees for a 30 year fixed rate mortgage at the maximum coverage level. The PMI fee is higher for adjustable rate mortgages (ARMs) although a mortgage with an interest rate that does not adjust within the first five years is considered a fixed rate mortgage for the purpose of calculating PMI (so a 5/1 and 10/1 ARM are considered fixed mortgages). The required ongoing PMI fee is also lower for mortgages with terms of 20 years or less.
Finally, there are different coverage levels for PMI, or how much of the mortgage is protected by the insurance. For example, for a mortgage with an LTV ratio between 95.01% and 97.00% you can purchase PMI that covers 18%, 25% and 35% of the loan balance. The amount of coverage required depends on the LTV ratio, mortgage program and lender policy. Most lenders and mortgage programs require maximum PMI coverage levels which are 35% of the loan amount (for LTV ratios between 95.01% and 97.00%), 30% of the loan amount (for LTV ratio between 90.01% and 95.00%), 25% of the loan amount (for LTV ratio between 85.01% and 90.00%) and 12% of the loan amount (LTV ratio between 80.01% and 85.00%). Some programs require lower coverage levels which reduces the PMI fee. The table below shows the PMI fee as a percentage of the loan amount based on the maximum required coverage levels.
Source: Genworth (June 2018)
Please note that your lender automatically removes PMI when your LTV ratio is 78% based on your scheduled mortgage payments and the value of the property when you obtained your mortgage. This is called cancellable PMI. For example, if you obtained a $90,000 mortgage on a property that was appraised at $100,000 at the time your mortgage closed, the lender automatically removes the PMI when your mortgage balance reaches $78,000 (78% LTV ratio) as you pay down your loan over time according to the original amortization schedule. In this example it takes approximately six years and nine months to reach a 78% LTV ratio (assuming a 30 year fixed rate mortgage).
In all other circumstances, the borrower must request the removal of PMI. Examples of situations where borrowers should request the removal of PMI include:
The required LTV ratio to remove PMI depends on if your removal request is based on the original property value at the time you obtained your mortgage or the current property value as well as how long you have had the mortgage, which is also referred to as "seasoning." For example, if you obtained a mortgage two years ago then the seasoning of the mortgage is two years. With most mortgages, if the seasoning is less than five years the LTV ratio must be 75% to 80%, or less, for PMI to be removed. The lower the required LTV ratio, the more challenging it is to have your PMI cancelled. If the seasoning of the mortgage is greater than five years then LTV ratio must be 80% or less, which means it is easier to cancel the PMI.
If you make a PMI cancellation request based on the original property value at the time your mortgage closed, such as if you accelerated or overpaid your mortgage and paid down your principal loan balance faster than required, the higher (easier) 80% LTV ratio may apply and you are not required to obtain an appraisal report. You can make a PMI cancellation request based on the original property value at any time over the course of your mortgage, even during the first five years of your loan.
Unless your principal loan balance falls below an 80% LTV ratio, usually because you overpaid your mortgage as outlined above, lenders typically do not remove PMI within the first two years of a mortgage, although you may be able to obtain a waiver for the two year mortgage seasoning requirement if you completed significant renovations that increased the value of your property. In this case you are required to obtain an appraisal report that confirms the new post-renovation property value and meet a 80% LTV ratio requirement based on your current home value.
Please note that a two year seasoning requirement waiver is usually not granted due to an increase in your property value not attributable to home improvements or renovations. In other words, if the value of your home increased because home prices in your neighborhood went up, and not because you improved your property, this is not sufficient to qualify for a waiver of the two year seasoning requirement.
If the seasoning of your mortgage is between two and five years and you make a PMI cancellation request based on your current property value, including cases when your property value increased due to favorable real estate market conditions or if you made improvements to your home, the lower (more challenging) 75% LTV ratio requirement usually applies. In this case you are also required to obtain an appraisal report that confirms the current, higher value of your property.
If you believe that your LTV ratio is lower than the required thresholds outlined above based on your loan seasoning, property value and individual circumstances, then you should contact your loan servicer -- the company to which you make your mortgage payment -- and request to have the PMI removed. To request the removal of PMI we recommend that you send a registered, return receipt letter to your lender. Your letter should include information that supports your request such as property values and comparable home sales in your area as well as your outstanding mortgage balance and estimated LTV ratio. After you receive confirmation that the lender has received your letter follow-up by calling the lender and initiating the process. Lenders delay removing PMI as long as possible so you need to be proactive and assertive.
If your cancellation request is based on your original property value, the lender should be able to quickly review your payment history and loan balance to determine if your LTV ratio meets the 80% requirement.
If your cancellation request is based on your current property value, the lender orders an appraisal report from an approved appraiser to determine the current market value of your property. The borrower is required to pay the appraisal fee which generally costs $400 - $750 depending on the approximate value of the property. The lender has 30 days after receiving the appraisal to inform the borrower if the request to remove PMI has been approved or denied.
Requesting the removal of PMI can be a time-consuming process and you may be required to pay for an appraisal but canceling PMI can save your a significant amount of money so it is usually worth the effort
If the appraised property value supports an LTV ratio less than the required LTV threshold, the PMI is cancelled and removed from your monthly payment. If the appraised property value falls below your expectations and the LTV ratio is greater than than the maximum threshold you can request a second appraisal but you are required to pay another appraisal fee. Before you request to have PMI removed, we recommend that you assess the approximate value of your property by contacting a real estate agent or using a property value website. Although you cannot rely solely on the property values provided by these websites, they provide a rough estimation of what your home is worth.
In order for PMI to be removed the borrower must be current on the mortgage and not have had a payment over 30 days late within the prior year or over 60 days late within the prior two years.
Watch our PMI video tutorial to learn more about private mortgage insurance and if you are required to pay it.
What is PMI and When Do I Need to Pay It? Instructional Video
It is important to highlight that some lenders may charge a higher mortgage rate instead of charging PMI -- this is often referred to as lender paid PMI. For example, the lender may offer you an mortgage rate of 4.000% if you make a down payment of 20% and an interest rate of 4.500% if you make a down payment of 10%. In many cases paying a higher interest rate by selecting lender paid PMI can cost more than borrower paid PMI because the you pay the higher rate over the life of the loan unless you are able to refinance.
Unlike borrower paid PMI, you cannot request to have lender paid PMI removed or your mortgage rate lowered -- you are stuck paying the rate as long as you have the mortgage
If you decide to make a down payment of less than 20% and the lender does not require that you pay PMI, be sure to ask if lender paid PMI is included in the interest rate, and if the answer is yes, ask what the interest rate would be if you paid PMI separately. If you pay for PMI separately, the interest rate could be lower and you will be able to have the PMI fee removed when your LTV ratio drops below the 75% - 80% threshold. This could save you a significant amount of interest expense over the life of your mortgage.
Although it is relatively uncommon, some borrowers select to pay a one-time, upfront PMI fee. This is also referred to as a single premium PMI fee. If you decide to pay for PMI upfront, you do not need to pay PMI on an ongoing monthly basis. Like ongoing monthly PMI, one-time PMI depends on several factors including your credit score and LTV ratio. If you decide to pay for PMI upfront, you cannot get it refunded, reduced or removed, even if your LTV ratio drops below 80%. The table below shows the estimated one-time, upfront PMI fee for a $300,000 30 year fixed rate mortgage with various LTV ratios.
PMI fees based on a borrower credit score of 720 - 739. Source: Genworth (June 2018)
PMI Requirements: https://www.fanniemae.com/content/guide/selling/b7/1/02.html
PMI Removal: https://www.fanniemae.com/content/guide/servicing/b/8.1/04.html#Borrower-Initiated.20Termination.20of.20Conventional.20Mortgage.20Insurance.20Based.20on.20Current.20Value.20of.20the.20Property
PMI Rates: https://new-content.mortgageinsurance.genworth.com/documents/rate-cards/national/monthly_premium_mi/MonthlyBPMIFixedRateCard.06042018.pdf