F.A.Q.

Q: What is PMI or MIP?

Private  mortgage insurance or “PMI” insures the lender against potential default on mortgage loans.  For FHA loans, it is called mortgage insurance premium or “MIP”.  PMI is required with most conventional (non-government backed) mortgages when the down payment is less than 20% of the property value.  That means the loan to value ratio (LTV) is greater than 80%.

PMI varies based on amount of the loan, LTV, a fixed or variable interest rate structure, and borrower credit score. PMI is paid most often each month as part of the mortgage.

The Homeowners Protection Act of 1998 requires automatic termination of mortgage insurance in certain cases for non-high-risk residential mortgage transactions when the loan-to-value on the home reaches 78%.  For FHA -insured loans, the cancellation requirements are often more difficult.

Q: How Much Does PMI Cost?

Similar to how the interest rate on a mortgage is calculated, the cost of private mortgage insurance varies based on credit scores, LTV and other pricing adjustments, e.g. size of loan, refinance or initial purchase, etc.  In general, PMI costs between .375% and 1.00%.  So on a $200,000 mortgage for example, PMI could cost as much as $167 per month (1% x $200,000 / 12).

Q: How Do I Get Rid of It?

PMI will end when the LTV ratio reaches 78%.  The lender will provide an amortization schedule and disclosure form at the loan closing.  You can also build a plan of attack to build value in the home and reduce the time needed to reach the 80% LTV threshold when you have the right to request that the lender cancel PMI.   Upon building value in the home and reaching the 80% LTV threshold, the lender can consider cancelling PMI upon written request.  Your closing documents should have a PMI statement that outlines  how to cancel and the specific rules for your loan.  Assuming interest rates are stable or falling there’s the option to refinance if you can’t cancel PMI with your current lender.

Q: What is LTV?

Loan-to-value (LTV) represents the ratio of the mortgage (the loan) as a percentage of the total appraised value of the house.  LTV of 80% or more is required to avoid PMI or MIP.

Private  mortgage insurance or “PMI” insures the lender against potential borrower default on conventional mortgage loans. PMI is required with most conventional (non-government backed / FHA) mortgages when the down payment is less than 20% of the property value.  That means the loan-to-value ratio (LTV) is greater than 80%.  LTV represents the ratio of the mortgage (the loan) as a percentage of the total appraised value of the house.  LTV ratio of 80% or LESS is required to avoid PMI or MIP.

In the first example below, LTV is 86.36%.  There is less than a 20% down payment to start the loan.

The second example shows the benefit of principal payments reducing the mortgage loan and the value of home appreciation, inflation and improvements on home value.  This is the part of the equation not considered by the lender during the life of PMI.

PMI varies based on amount of the loan, LTV ratio, a fixed or variable interest rate structure, and credit score.  PMI is paid most often each month as part of the mortgage.

The Homeowners Protection Act of 1998 requires automatic termination of mortgage insurance in certain cases for non-high-risk residential mortgage transactions when the loan-to-value on the home reaches 78%.  For FHA -insured loans, the cancellation requirements are often more difficult.  Remember, this process does not consider other factors such as market appreciation, inflation and home improvements that can increase home value and allow for PMI cancellation much sooner.

More information on the Homeowner’s Protection Act of 1998

Q: Can I Avoid PMI?

Yes.  You can put down 20% or more on the home purchase.  You can also consider lender paid mortgage insurance (LMPI) where the lender will cover the PMI with a slight increase in the mortgage interest rate.  In essence, the lender charges a higher interest rate to offset their cost for PMI.  The LPMI terminates when the mortgage is paid off or refinanced.  The lender can provide an illustration showing the cost differences between borrower paid mortgage insurance (BPMI) and LMPI.

en_USEnglish
en_USEnglish