Private Mortgage Insurance (PMI)

What is PMI?  And how to cancel PMI.

Last update: June 2013 (includes new FHA rules & rates)

When your down payment is less than 20%, you usually have to pay for Mortgage Insurance, (PMI).  This protects the lender in case you don't make your house payments, they repossess your house, and they have to sell it for less than the amount left on the loan.

So the bank gets protected and you get to pay for their protection.  What's in it for you?  What's in it for you is that you get to buy a home for less than 20% down!  In times past, banks wouldn't give you a loan under any circumstances unless you made a large down payment because they felt it was too risky.  But now thanks to PMI, banks will take loans with very low down payments.  That makes it much easier for you to get into a home.

FHA Loans are a kind of mortgage insurance.  You pay fees to FHA in exchange for their guaranteeing your loan to the bank, so the bank will let you put less than 20% down.  It's not private mortgage insurance, since FHA is the government, not a private insurance company, but it works just like PMI.  On the rest of this page I may use "PMI" to refer to even the fees charged by FHA, for simplicity.

Now that you know what the FHA program is, you need to know that starting in 2013, FHA fees exploded.  Let's compare the fees on FHA loans to the PMI on conventional loans.

These changes were partially made to start getting the government out of the mortgage insurance business, and move more of that business to the private sector.  (So much for Obama's supposedly socialist agenda.)  Anyway, if you qualify for a conventional loan, then take it, since FHA loans now come with a much higher price tag.

There's no PMI on VA (veterans) loans, which is a nice bonus if you qualify for one of these.

You don't shop for PMI.  If your lender requires it, they'll choose it and add it automatically.  The rate depends mostly on the loan amount, down payment (bigger down payments mean less PMI), loan term, and your credit score.  PMI on conventional loans is based on the original loan value (so the PMI premium doesn't change over the life of the loan) (Bankrate), while the fees on FHA loans are based on the outstanding balance. (FHA)

The PMI premium is paid monthly as part of your mortgage payment.  My PMI Calculator will give you a good estimate, though it's not exact, since different insurers charge different rates.

A rough way to estimate the monthly PMI cost for 30-year conventional loans is to divide the loan amount by 900, 1300, 1900, or 3200 for loans with down payments of 3%, 5%, 10%, or 15% respectively. For example, let's say you buy a $200,000 home and put 5% down. Your down payment is $10,000 and the morgtage is $190,000.  Divide the $190,000 mortgage by 1500 and you get your monthly PMI cost, $127. PMI doesn't change as the outstanding balance changes.

Canceling PMI

PMI is usually canceled automatically after some period of time.  That's good for you, because PMI is expensive, and once you've purchased your home, PMI does nothing for you.  But for FHA loans made after June 3, 2013 where your down payment is less than 10%, PMI is never canceled.  The only way to get rid of PMI on such loans is to refinance the loan as a conventional loan.

This table shows how PMI is canceled according to the type of loan.

How PMI is canceled by type of loan
Type of Loan	How PMI is canceled
Conventional loan signed on or after July 29, 1999,   no missed payments in the last 12 months	Automatically once paid equity reaches 22%,   or by request from borrower once total equity reaches at least 20%
Conventional loan signed on or after July 29, 1999,   any payments missed in the last 12 months	Automatically after 15 years, for 30-year loans
Conventional loan signed before July 29, 1999	Borrower must request cancellation
FHA loan, down payment is 10% or more	Automatically after 11 years (same for both 15- & 30-year loans)
FHA loan, down payment is less than 10%	Can't be canceled. Must refinance as a conventional loan to get rid of it.

(Source for FHA: HUD)

For automatic cancelation of PMI on conventional loans, here's how long it will take to reach 22% equity, depending on the length of the loan and the interest rate, ignoring any possible appreciation:

From this table you might think "Wait a minute � on a 30-year loan I should own about half of my house after about 15 years, but with a 10% interest rate and a 5% down payment you're saying I'd own only 22%?! What gives?"

The answer is that because of how mortgage interest works, most of your payments in the early years goes to interest, not paying down your loan.  On a 30-year loan of $100k at 7%, the payment is $665/mo., but when you make the first payment, a whopping $583 goes to interest, and a mere $82 goes towards owning the home. On 15-year loans a much higher percentage goes towards the home itself.  There's more on this in my pages about 15 vs 30 year loans and  paying off a loan early.

But let's get back to PMI and canceling it.  You don't have to wait for the automatic cancellation at 22%. You can write to the insurance company and ask them to cancel your PMI coverage as soon as you hit 20% equity.  And that's total equity, not just paid equity:  If your house has increased in value then you suddenly own a lot more of it, and you can cancel your PMI even earlier. For example, let's say you put $5,000 down on a $100,000 home, and in a couple of years the value shoots up to $119,000 because it's a hot real estate market. You own the $5000 you put into the house, plus the $19,000 it increased, for a total of $24,000. (You also own the equity you built from making mortgage payments, but because of how mortgage interest works, most of your payments for the first few years goes to interest and not principal, so we'll ignore paid equity for our example.)  So the $24,000 you own divided by the $119,000 value of the home means you own over 20% of your home.  So you don't need PMI any more.  But to cancel the PMI you'll need to convince the lender that your home is really worth $119,000 now, so you'll have to pay for an appraisal which might run $400 or so.  You'll have to weigh the cost of the appraisal against the amount you'll save by canceling PMI early to see if it's a good deal for you.

References

• New FHA rules, June 2013
• Canceling PMI by BankRate
  
• Article examining the overall advantage of PMI to homeowners, Auburn University, 1997

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