Private Mortgage Insurance (PMI) (2024)

FAQs

What is the truth about PMI insurance? ›

It typically applies to borrowers whose down payment on a home is less than 20 percent of the purchase price. Although the borrower is paying for it, PMI actually protects the lender. It compensates them for the extra risk they're assuming by extending a larger loan, and demanding less cash upfront from you.

PMI protects the lender—not you—if you stop making payments on your loan. The requirement to buy PMI usually also applies to refinancing a conventional loan, when your equity is less than 20 percent of the value of your home.

But in general, the cost of private mortgage insurance, or PMI, is about 0.5 to 1.5% of the loan amount per year. This annual premium is broken into monthly installments, which are added to your monthly mortgage payment. So a $300,000 loan would cost around $1,500 to $4,500 annually — or $125 to $375 per month.

Depending on your personal financial situation, location and lifestyle, that may or may not be realistic. That's why paying PMI isn't necessarily a bad thing if you can easily afford it. But if PMI would strain your budget or cause you to spend significantly more on a home than you'd like, it's a good idea to avoid it.

Paying private mortgage insurance adds to your monthly mortgage payment, but it doesn't have any negative effects beyond costing you some extra cash. On the plus side, PMI can allow you to buy a home — and begin building home equity — more quickly than if you waited until you saved up a 20% down payment.

Here's a caveat: To cancel based on current value, you must have owned the home for at least two years and have 75% LTV. If you've owned the home for at least five years, you can cancel at 80% LTV.

Refinance into a conventional loan. Refinancing into any type of conventional loan will remove FHA MIP. However, based on the property's loan –to-value ratio you could be required by the lender to pay private mortgage insurance (PMI).

Unlike the principal of your loan, your PMI payment doesn't go into building equity in your home. It's not money you can recoup with the sale of the house, it doesn't do anything for your loan balance, and it's not tax-deductible like your mortgage interest.

The lender adds the cost of PMI to your mortgage payment each month, in an amount based on how much you've borrowed. The good news is that PMI can usually be canceled after your home's value has risen enough to give you 20% to 25% equity in your house.

How do I get rid of PMI without 20 percent? ›

One effective method on how to avoid PMI involves purchasing property that is likely to appreciate in value. Once your home's value increases sufficiently to lower your loan-to-value ratio (LTV) below 80%, some banks may permit you to request PMI cancellation.

Dear (Servicer Name): I am requesting to cancel my private mortgage insurance. The coverage is with (Mortgage Insurance Company Name) and my mortgage loan number is (loan number). I have included documentation to support why I think the equity in my home has reached or exceeded 20%.

You can contact your lender and request an early termination of PMI as soon as you've paid your mortgage down enough to have an 80% loan-to-value ratio (LTV).

Is mortgage insurance tax-deductible? No, private mortgage insurance isn't tax-deductible. The mortgage insurance deduction was made available again for eligible homeowners for the 2018, 2019, 2020 and 2021 tax years. It has not been renewed for the 2022 and 2023 tax years.

On average, PMI costs range between 0.22% to 2.25% of your mortgage. How much you pay depends on two main factors: Your total loan amount: As a general rule, PMI expenses are higher for larger mortgages. Your credit score: Lenders typically charge borrowers with high credit scores lower PMI percentages.

Combined with paying down your loan, you could potentially have the 20% equity you need to refinance your loan without the need for PMI. This could save you hundreds of dollars a month that could be used to pay down more of your home loan principle each month or used for other things.

If you can easily afford it, you should probably put 20% down on a house. You'll avoid paying for private mortgage insurance, and you'll have a lower loan amount and smaller monthly payments to worry about. You could save a lot of money in the long run.

The Bottom Line: Getting Rid Of PMI Can Save You Money

But the only protection it gives you as the buyer is the freedom to make a smaller down payment. As you build equity in your home, you may be able to cancel your PMI so you can save money each month.