Learn the Basics of PMI, How It Helps with Homebuying and Ways Around It
What is PMI? Private Mortgage Insurance Basics
Updated: October 21, 2023
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Financing your home purchase with a conventional mortgage and less than 20 percent down? You'll need private mortgage insurance (PMI). This product benefits your lender more than you, though — it protects the lender's investment if you default on the loan. Usually, the smaller the down payment, the more the insurance will cost. This page is an insider's guide to private mortgage insurance.
How PMI Helps Consumers Afford More Expensive Homes
Mortgage insurance allows cash-strapped homebuyers to potentially qualify for a bigger mortgage — and therefore, buy a more expensive house — than they could get with just a down payment. Lenders usually base mortgage decisions on the 43 percent rule, meaning the borrower's total monthly living expenses cannot be more than 43 percent of gross monthly income. For example, a person making $100,000 annually should only have up to $43,000 in housing and living expenses. Dividing this amount by 12 gives a monthly expense of about $3,583.
Let's say the borrower has $20,000 in cash for a down payment:
Alternatives to Paying for Private Mortgage Insurance
The simplest way to sidestep PMI is to provide a down payment of at least 20 percent of the home's purchase price. However, if putting down 20 percent will deplete your savings, Freddie Mac says buying PMI is the better option.
Seller concessions are another possibility. A realtor could negotiate for the seller to contribute a fixed sum to the buyer toward closing costs and PMI. For a highly motivated seller, this could make the difference in whether the loan will close.
Shopping around can pay off, too. There are lenders that offer programs to help borrowers with small down payments possibly avoid PMI, including Bank of America's Affordable Loan Solution Mortgage. The product lets income-eligible borrowers make a down payment as low as 3 percent with no PMI. To qualify, borrowers' income cannot exceed the Department of Housing and Urban Development's median income where they live, and they must have at least a 660 credit score.
Below is a rundown of different options for avoiding private mortgage insurance.
How to Remove Private Mortgage Insurance
Homeowners who pay PMI will continue to bear this cost unless they take action by:
Refinancing the mortgage with the same or a different lender.
Paying for a home reappraisal that could eliminate or reduce the PMI amount they must pay.
Waiting until the balance on the mortgage drops to 78 percent to 80 percent of the home value. In the wait-it-out approach, lenders reason that by the time the balance is down to 80 percent of the property value, the borrower's stake in the house, at 20 percent, is sufficient incentive to stay current on mortgage payments to protect the borrower's own investment.
The U.S. Homeowners Protection Act gives you the right to request a PMI cancelation on the date when the principal balance on your mortgage falls to 80 percent of your home's original value. This date must be given to you in writing on a PMI disclosure form when receiving a mortgage, according to the CFPB. Your lender must cancel PMI when your loan balance drops to 78 percent of your home's original value, even if you don't request a PMI cancelation. The most important thing to remember is mortgage payments must be kept current to terminate PMI, no matter how much is left on the balance.
Quick-Hit Insider Advice from a PMI Expert
Michael Zimmerman is head of investor relations for MGIC Investment Corp., which underwrites private mortgage insurance to lenders in the U.S. Zimmerman was promoted to lead investor relations in 2003. He joined MGIC in 1995 as vice president of mortgage banking strategies.
Resources
What is Private Mortgage Insurance?
The Consumer Financial Protection Bureau explains types of PMI, why it's required and why the borrower must pay the cost.
Down Payments and PMI
Freddie Mac's explainer on private mortgage insurance and down payment sizes.
Tips on Removing PMI
Information on when and how to get rid of PMI on a loan.
FHA Mortgage Insurance
FHA lenders require mortgage insurance when a borrower makes a down payment that's less than 20 percent of a home's purchase price or appraised value. This page explains the basics.
Glossary of Mortgage Terms
Explanations of common mortgage terms to help you prepare when meeting a lender or mortgage broker.
First-Time Homebuyers
New to the mortgage process? This MoneyGeek guide to first-time homebuying takes a comprehensive look at the documents you'll need to process a loan, set a budget, choose the right lender and loan, and much more.
Learn About Conventional Mortgages
This MoneyGeek page provides a complete rundown on this most basic type of mortgage loan.
Federal Trade Commission
Mortgage advice from the FTC.
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