5 Types of Private Mortgage Insurance (PMI) (2024)

The example above shows that it will take 88 months—or 7.3 years—of PMI payments before 20% equity has been built up with a 10% down payment. As a result, the total PMI cost will equal $6,600.

Also, by putting down only 10%, the borrower has a higher mortgage payment ($1,154.19 vs. $959.28), which will cost more in total interest cost for the loan.

How Long Do You Have to Buy PMI?

Borrowers can request the elimination of monthly mortgage insurance payments once the loan-to-value ratio drops below 80%. For example, if you had a $100,000 mortgage loan, you could cancel your PMI once $20,000 of the outstanding loan balance was paid down. However, your mortgage payments must be current, and no additional liens can exist on the property. You may need a current appraisal to substantiate your home’s value.

Automatic Cancellation of PMI

However, the lender must automatically cancel PMI once the loan's LTV ratio falls to 78%, as long as you're current on your mortgage. In other words, once you reach 22% equity in your home, following your mortgage payments and the down payment, the lender is required by the federal Homeowners Protection Act to cancel the PMI. Even if your home’s market value had gone down, the lender must cancel the PMI as long as you paid off 22%.

Home Market Value Rises

Some loan servicers permit borrowers to cancel PMI sooner based on home value appreciation. Suppose the borrower accumulates 25% equity due to the home's value appreciating in years two through five or 20% equity after year five of the loan. In that case, the PMI can be cancelled once the price appreciation has been verified by an appraisal.

Refinancing

For some, refinancing your mortgage into a loan without the PMI requirement can help cancel PMI. During a refinance, the borrower usually books a new loan to pay off the existing mortgage to take advantage of a drop in interest rates.

However, you can take out a second mortgage or a home equity loan for the 20% down payment value. You'll have two mortgage payments: One for the 80% loan to value and one for the 20%, but no PMI. If you qualify, you can also refinance into a VA loan, insured by the Department of Veterans Affairs. VA loans do not charge PMI.

Benefits of PMI

Private mortgage insurance (PMI) benefits both the lender and the borrower.

Benefits to the Lender

PMI protects the mortgage lender against a default by the borrower early in the loan. Revisiting our earlier example, suppose a borrower puts down 10% on a $200,000 home and takes out a loan for the remaining 90% of the property’s value—$20,000 down and a $180,000 loan.

The lender's losses are limited if the borrower defaults and the lender must foreclose on the loan. The mortgage insurance company covers a certain percentage of the lender’s loss—let’s say for 25%.

The mortgage loan goes into foreclosure with a $170,000 balance remaining on the mortgage loan or 85% of the home’s $200,000 purchase price ($170,000 ÷ $200,000). The PMI policy would cover 25% or $42,500 ($170,000 * 0.25).

The insurance money helps the lender recoup delinquent accrued interest and foreclosure costs. Instead of potentially losing the full $170,000, the lender would only lose 75% of $170,000, or $127,500, on the home’s principal. In reality, the lender would eventually resell the home and recoup some or all of the remaining loan balance.

PMI protects the lender, but the borrower must pay for it. Essentially, the borrower compensates the lender for taking on the higher risk of lending to them versus a borrower who put down a larger down payment.

Benefits to the Borrower

The borrower also benefits from PMI by the ability to buy a home with a smaller down payment, which results in more money for repairs, remodeling, furnishings, and emergencies.

While PMI is an added expense, so is continuing to spend money on rent and possibly missing out on market appreciation as you wait to save up a larger down payment. However, there's no guarantee you'll come out ahead buying a home.

For those who cannot afford a 20% down payment, PMI makes it possible to become homeowners sooner. Also, PMI can help those who can't afford the full 20% down payment obtain financing.

Some potential homeowners may need to consider Federal Housing Administration (FHA) mortgage insurance. These FHA-insured loans offer flexibility, including a lower down payment for first-time homebuyers who meet the qualifications for a Federal Housing Administration loan (FHA loan).

Types of Private Mortgage Insurance (PMI)

1. Borrower-Paid Mortgage Insurance

The most common type of PMI is borrower-paid mortgage insurance (BPMI), which is a monthly fee in addition to your mortgage payment. After your loan closes, you pay BPMI every month until you have 22% equity in your home (based on the original purchase price).

At that point, the lender must automatically cancel BPMI, as long as you’re current on your mortgage payments. Accumulating enough home equity through regular monthly mortgage payments can take several years to get BPMI canceled.

2. Single-Premium Mortgage Insurance

With single-premium mortgage insurance (SPMI), also called single-payment mortgage insurance, you pay mortgage insurance upfront in a lump sum at the closing.

Single-premium mortgage insurance (SPMI) lowers your monthly housing expenses compared to BPMI. SPMI can help borrowers qualify for a mortgage or a larger loan since the monthly mortgage servicing costs are lower.

Also, paying SPMI upfront avoids the need to monitor your loan-to-value ratio to see when PMI will be canceled, and you avoid the need to refinance to get out of PMI.

However, the risk of paying SMI upfront comes if you refinance or sell within a few years; no portion of the SPMI is refundable. Another drawback of SPMI is that it's more money out of pocket at the loan's closing in addition to the down payment and closing costs.

If you can't afford to pay for the SPMI upfront, you can finance it into the mortgage loan—called single-financed mortgage insurance. However, adding SPMI to your loan balance means you'll pay interest on it for the life of the loan.

Other options include asking the seller or, in the case of a new home, the builder if they will pay the mortgage insurance by negotiating that as part of your purchase offer.

If you plan to stay in the home for three or more years, single-premium mortgage insurance may save you money. Ask your loan officer to see if this is the case. However, be aware not all lenders offer single-premium mortgage insurance.

3. Lender-Paid Mortgage Insurance

With lender-paid mortgage insurance (LPMI), your lender will technically pay the mortgage insurance premium. However, you will actually pay for it over the life of the loan in the form of a slightly higher interest rate.

Unlike BPMI, you can't cancel LPMI when your equity reaches 78% because it is built into the loan. Refinancing will be the only way to lower your monthly payment. Your interest rate will not decrease once you have 20% or 22% equity. Lender-paid PMI is not refundable.

The benefit of lender-paid PMI, despite the higher interest rate, is that your monthly payment could still be lower than making monthly PMI payments. That way, you could qualify to borrow more.

4. Split-Premium Mortgage Insurance

Split-premium mortgage insurance is a hybrid of BPMI and SPMI. With the split premium option, you pay a portion of the mortgage insurance as a lump sum at closing and a portion monthly.

You don’t have to come up with as much cash upfront as you would with SPMI, nor do you increase your monthly payment by as much as you would with BPMI.

One reason to choose split-premium mortgage insurance is if you have a high debt-to-income ratio. When that's the case, increasing your monthly payment too much with BPMI would mean not qualifying to borrow enough to purchase the home you want.

The upfront premium might range from 0.50% to 1.25% of the loan amount. The monthly premium will be based on the net loan-to-value ratio before any financed premium is considered.

As with SPMI, you can roll it into your mortgage or ask the builder or seller to pay the initial premium. Split premiums may be partly refundable once mortgage insurance is canceled or terminated.

5. Federal Home Loan Mortgage Insurance Premium (MIP)

An additional type of mortgage insurance comes with mortgage loans insured by the Federal Housing Administration (FHA). The FHA insures mortgage loans to protect lenders against borrower default. In return, FHA mortgage loans offer benefits to borrowers that include a 3.5% down payment, particularly for first-time home buyers. FHA loans help those who wouldn't otherwise be able to afford the traditional 20% down payment.

However, FHA mortgages require the borrower to pay a mortgage insurance premium (MIP). Also, the homes must meet specific criteria for livability to be eligible for MIP coverage; otherwise, they are considered uninsurable.

Furthermore, MIP cannot be removed without refinancing the home. It includes both an upfront payment and monthly premiums—usually added to the monthly mortgage payment. The buyer must wait 11 years before removing the MIP from the loan if they made a down payment of more than 10%.

Cost of Private Mortgage Insurance (PMI)

The cost of PMI premiums will depend on several factors.

• Which premium plan you choose
• Whether the interest rate is fixed or adjustable
• Loan term
• Down payment or loan-to-value ratio (LTV)
• Amount of mortgage insurance coverage required by the lender or investor
• Whether the premium is refundable or not
• The borrower's credit score
• Any additional risk factors, such as the loan being for a jumbo mortgage, investment property, cash-out refinance, or second home

Typically, the riskier you look according to any of these factors (usually taken into account whenever you are taking out a loan), the higher your premiums will be. For example, the lower your credit score and down payment, the higher your premiums.

According to data from Ginnie Mae and the Urban Institute, the average annual PMI typically ranges from 0.55% to 2.25% of the original loan amount each year. For example:

• If you put down 15% on a 15-year fixed-rate mortgage and have a credit score of 760 or higher, for example, you'd pay 0.17% because you'd likely be considered a low-risk borrower.
• If you put down 3% on a 30-year adjustable-rate mortgage with a 3-year introductory rate and you have a credit score of 630, your rate will be 2.81%, because you'd be considered a high-risk borrower at most financial institutions.

Once you know which percentage applies to your situation, multiply it by the borrowed amount. Then divide that amount by 12 to determine your monthly payment. For example, a $200,000 loan with an annual premium of 0.65% would cost $1,300 per year ($200,000 x .0065) or about $108 monthly ($1,300 ÷ 12).

Estimating Rates for PMI

Many companies offer mortgage insurance. Your lender—not you—will select the insurer. Nevertheless, you can get an idea of what rate you will pay by studying the mortgage insurance rate card. MGIC, Radian, Essent, National MI, United Guaranty, and Genworth are major private mortgage insurance providers.

Mortgage insurance rate cards can be confusing at first glance. Here’s how to use them.

1. Find the column that corresponds to your credit score.
2. Find the row that corresponds to your LTV ratio.
3. Identify the applicable coverage line. Search the web for Fannie Mae's Mortgage Insurance Coverage Requirements to identify how much coverage is required for your loan. Alternatively, you can ask your lender (and impress them with your knowledge of how PMI works).
4. Identify the PMI rate that corresponds with the intersection of your credit score, down payment, and coverage.
5. If applicable, add or subtract to that rate the amount from the adjustment chart (below the main rate chart) that corresponds with your credit score. For example, if you’re doing a cash-out refinance and your credit score is 720, you might add 0.20 to your rate.
6. Multiply the total rate by the amount you’re borrowing; this is your annual mortgage insurance premium. Divide it by 12 to get your monthly mortgage insurance premium.

Your rate will be the same every month, though some insurers will lower it after 10 years. However, that's just before the point when you should be able to drop coverage, so that any savings won't be that significant.

Rates for MIP

For most borrowers, MIP—required for FHA-backed loans—will be more expensive than PMI. With PMI, you won't pay an upfront premium unless you choose single-premium or split-premium mortgage insurance. However, everyone must pay an upfront premium with FHA mortgage insurance. What is more, that payment does nothing to reduce your monthly premiums.

As of 2023, the upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount. You can pay this amount at closing or finance it as part of your mortgage. The UFMIP will cost you $1,750 for every $100,000 you borrow. If you finance it, you’ll pay interest on it, too, making it more expensive over time. The seller is permitted to pay your UFMIP as long as the seller’s total contribution toward your closing costs doesn’t exceed 6% of the purchase price.

With an FHA mortgage, you'll also pay a monthly mortgage insurance premium (MIP) of 0.15% to 0.75% of the loan amount based on your down payment and loan term. As the FHA table below shows, if you have a 30-year loan for $200,000 and you're paying the FHA's minimum down payment of 3.5%, your MIP will be 0.55% for the life of the loan. Not being able to cancel your MIP can be costly.

For 30-year FHA loans with a down payment of 10% or more, you can cancel your monthly MIP after 11 years. Without putting down 10% or more on an FHA mortgage, the only way to stop paying MIP is to refinance into a conventional loan. This step will make the most sense after your credit score or LTV increases considerably.

Refinancing means paying closing costs, however, and interest rates might be higher when you're ready to refinance. Higher interest rates plus closing costs could negate any savings from canceling FHA mortgage insurance. Furthermore, you can't refinance if you're unemployed or have too much debt relative to your income.

The Bottom Line

Mortgage insurance costs borrowers money but enables them to become homeowners sooner by reducing the risk to financial institutions of issuing mortgage loans to borrowers with small down payments. You might find it worthwhile to pay mortgage insurance premiums if you want to own a home sooner rather than later. Premiums can be canceled once your home equity reaches 80%. However, with FHA-insured loans, mortgage insurance premiums continue for the life of the loan unless you refinance the loan into a conventional mortgage.