What is PMI? And when do I have to pay it?

PMI is short for Private mortgage insurance. Private mortgage insurance is an insurance the bank requires some buyers to pay as a penalty for not putting 20% down payment. Essentially the bank takes on more risk when the buyer doesn’t have enough “skin in the game” for which 20% happens to be the fine line. When you put down 0, 3%, 5%, 10% or even 15% the bank wants added protection that you won’t default on the loan. This is accomplished by having a 3rd party insure the loan so that the bank won’t suffer the loss of the loan. The insurance is usually billed monthly and added onto your mortgage payment though it can be paid upfront at once or it can also be factored into the rate as an alternative. Some first time buyer programs do not require PMI to be paid as a benefit to the program. Other programs or investors offer options where the rate is essentially baked into the deal and so the buyer doesn’t see the PMI but the rate is increased to cover.

PMI cost will vary for each scenario. There are several PMI providers and they all have different costs and pricing structures. In addition there are different factors that change the PMI costs for each provider. The main items are: down payment amount (LTV), debt ratio, credit score and loan amount. The PMI is quoted as a % - like .50% of the loan amount. So if your loan amount was $300,000 and the PMI quote was .50% that means you are paying $1500 a year or $125 per month. The better the credit score typically the lower the PMI and the more down payment typically the lower the pmi (up until 20% where you wouldn’t have to pay PMI). But 3% down would have a higher PMI than 5% down, and 10% or 15% down would be the lowest PMI factor. Credit scores of 780, or 760 or 740 will be a lower PMI factor than a 720 or 700 or lower.

PMI does go away in most cases (not for FHA loans) and here are the situations in which PMI can be removed generally speaking – this does not apply to every deal and you need to confirm on a case-by-case.

  1. Automatic termination once the loan reaches 78% LTV of original value
  2. Customer can request PMI cancellation once the loan reaches 80% LTV of original value
  3. Customer can request PMI cancellation based on updated value (new appraisal)
    • 80% LTV if the loan history is greater than 5 years
    • 75% LTV if the loan history is between 2-5 years
    • 75% LTV if the loan history is less than 2 years and the increase in value is a result of improvements to the property and the borrower is the original

Chris Butts

VP Sales Manager

NMLS# 613440

Chris Butts is a Loan Originator and Sales Manager at Leader Bank. He has been in the mortgage industry for over 15 years and is committed to providing his customers with the highest quality service. His extensive experience and knowledge allow him to effectively and consistently help his customers during the loan process, whether it’s a first time home buyer, a refinance or purchasing a dream home.

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