What the Heck Is PMI?
PMI stands for private mortgage insurance. If you can't put down at least 20 percent when you're buying a home, your lender will make you buy it.
"PMI exists to protect lenders—and only lenders—from missed mortgage payments," says John Walsh, the CEO of Total Mortgage, a Milford, Conn.-based mortgage lender that serves 41 states and the District of Columbia. The insurance makes it less risky for lenders to grant mortgages to people with a low down payment and borrowers with a less-than-stellar credit score, he explains. PMI does not protect you if you can't cover your payments.
Here's the lowdown on how PMI and mortgage insurance in general work, how to reduce your costs of coverage, and how to avoid the expense altogether.
How PMI Works
• Who has to have mortgage insurance? For conventional mortgages issued by banks and other private lenders, you must pay private mortgage insurance until your home equity is 20 percent of your home's total value. The coverage is provided by private insurers.
If your mortgage was issued through a government program, you'll also need mortgage insurance, but it won't be privately issued. The Federal Housing Administration is the insurer for the FHA loans it sponsors, as well as for loans sponsored by the U.S. Department of Agriculture. The Veterans Administration insures its own loans. As the Consumer Financial Protection Bureau notes, the cost and terms for each coverage vary.
• How much does PMI cost? Typically, PMI runs from 0.5 percent to 0.6 percent of the original loan amount annually, says John Clifford, senior vice president of commercial operations for Genworth, a supplier of private mortgage insurance and other coverages. (On a $200,000 mortgage, that's a range of $83 to $100 a month in premiums.) The coverage can go as low as 0.19 percent of the loan amount to as high as 2.25 percent, Walsh adds. The more you put down, the higher your credit score, and shorter the term of the loan, the less costly your PMI will be.
• Can you shop for mortgage insurance? No. Your lender picks the insurer from one of seven PMI providers nationwide. Joseph Frederick, a veteran mortgage originator based in Brookfield, Wisc., says you have the right to ask your lender to find you the lowest PMI premium available.
• How do I pay for mortgage insurance? The cost of the premium is typically applied to your monthly mortgage payment, although you can opt to pay the whole premium upfront. However, if you opt to pay upfront and subsequently move or refinance your mortgage, you may not be entitled to a refund. Most PMI payments are made monthly.
How to Reduce Payment Pain
• When can you dump PMI? You can quit paying PMI when your equity reaches 20 percent of the home value. To reach that goal, plan to make extra principal-only payments when you can. You can also re-appraise your home following a run-up in values in your local real-estate market, or after you've made significant home improvements. "Many people will reach the PMI cutoff on their homes through appreciation or improvement sooner than the amortization of the loan," Frederick says.
Keep an eye on your mortgage statement and submit a written cancellation request to your lender when your home equity is about to reach 20 percent. The lender is legally required to terminate your PMI when your equity reaches 22 percent, but why wait till then?
• Are there other ways to save on PMI? Frederick says it's also possible, as part of the offer to purchase, to negotiate to have the seller finance all or part of the PMI.
Alternatively, consider "lender-paid mortgage insurance." In exchange for paying your PMI for you, the lender bumps up your interest rate to compensate, Walsh explains. You'll need to do some calculations to determine whether this is worthwhile.
• Can I write off PMI on my taxes? Yes. Congress has extended the ability of homeowners to itemize mortgage insurance premiums through 2016. Income limits apply, however. A married couple filing jointly must have adjusted gross income at or below $109,000 in 2016, or $54,500 for a single person or married person filing separately.
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