Private Mortgage Insurance (PMI) is paid by a borrower whose down payment is less than 20% of the sales price, which means the mortgage exceeds 80% of the loan-to-value (LTV) of the property. PMI is an extra premium required by the lender to protect the lender in case of a foreclosure. PMI protects the lender, not the borrower. As a borrower, you cannot choose the mortgage insurance company and you cannot negotiate the cost of the premium.
FHA charges for mortgage insurance as well. Not only do you pay an upfront premium for mortgage insurance, but you pay a monthly premium, along with your principal, interest, insurance for property coverage and taxes.
How Do You Cancel Private Mortgage Insurance?
As soon as you have over 20% equity in your home, either from paying down the mortgage or from appreciation, you may be eligible to stop paying PMI. Ask your lender when and how you can cancel PMI. The lender will require proof of your equity position by asking you to get and pay for an independent appraisal.
FHA rules are different. With an FHA loan, your mortgage must be paid down to 78% of the original sales price. It does not matter if appreciation has bumped up your equity. FHA requires a reduction of your original principal balance.
How Can You Avoid Paying for Private Mortgage Insurance?
You can avoid paying for private mortgage insurance if you meet certain criteria, and you may or may not qualify.
- Pay 20% or more down as your down payment.
- Pay a higher interest rate.
- Get a combination loan, such as 80/10/10. This is 80% first mortgage, 10% second mortgage, 10% down payment.
- If you are a veteran, get a VA loan which has no PMI.