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What is PMI (Private Mortgage Insurance) and Why Am I Paying It?

What is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is normally required on a conventional mortgage if the borrower’s down payment is less than 20% of the property's value. PMI is a protection for the lender if the borrower stops making their mortgage payments and defaults on the loan.

For example, if you were to purchase a home for $300,000, you should anticipate a down payment of $60,000 to not pay PM, anything less, you would have to pay PMI.

The good news is that PMI doesn’t last forever.  You can request to have PMI removed once you reach 20% equity in your home or it’s typically removed once you’ve reached 22% equity (equity being the difference between how much your home is worth and how much you owe on your mortgage).

Read more about home equity here

What determines how much PMI you will pay?

PMI costs can vary from about 0.20% to 2% of the loan balance per year. So, for example, on a $300,000 mortgage, the PMI would range from $600 to $6,000. How much you pay depends on the size of your down payment, mortgage size, loan type, and credit score. The greater your risk factors, the higher the rate you'll pay.

  • Down Payment Amount

The amount of your down payment is a primary factor in determining how much PMI you will have to pay. The lower the down payment, the higher the risk for the lender. It also means your monthly mortgage payments may be higher and therefore take longer before you reach 20% equity.

Consider increasing your down payment, even if you can’t get to the 20%. If you can put more towards your down payment, it may reduce the amount of PMI you will have to pay.

Calculate potential mortgage payments with our mortgage calculator
  • Amount of Mortgage Loan

The more you borrow, the more you may have to pay for PMI.

  • Loan Type

The type of loan you have can affect how much PMI you will have to pay. PMI may cost more for an adjustable-rate mortgage than a fixed-rate loan because the rate will change over time resulting in inconsistent mortgage payments. This creates a riskier loan. Less risk results in lower mortgage insurance requirements.

Review loan type options
  • Credit Score

PMI will cost less if you have a higher credit score. Generally, you'll see the lowest PMI rates for a credit score of 760 or above.

Ways to remove PMI

PMI can be removed during a refinance if you have reached 20% equity. You can speed up the process of reaching 20-22% by making extra payments toward your mortgage each month. Just make sure to speak with your mortgage company to confirm they’re applying the extra payments to principal.

If your home’s value has increased, you may be able to provide a new appraisal showing you now meet the loan-to-value, or LTV, requirements to have PMI removed.

If you are interested in refinancing or you think your home has increased in value, reach out to a PHH Loan Officer today to see if your PMI can be removed! Call (800) 451-1895 or apply now