Mortgage Insurance

Private mortgage insurance (PMI) is normally required when you buy or refinance a home with less than 20% equity. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. Because of this protection, buyers are able to purchase homes with significantly lower down payments!

In addition to your monthly principal and interest payment, taxes and homeowners insurance, your monthly payment will include 1/12 of your annual PMI premium, if applicable. As with your property taxes and homeowners insurance, the lender will make the payment on your behalf, from the funds available in your escrow account.

Conventional Mortgages
The monthly PMI premium varies depending on one's credit, the type of mortgage and the loan-to-value. A lower down payment will result in a higher premium. For example, the PMI premium for a conventional 30-year fixed mortgage based on $100,000 purchase with 5% down is $61.75 per month. The same purchase with 10% down would lower the premium to $41.17 monthly.

Government Mortgages
The Federal Housing Authority (FHA) handles mortgage insurance differently as compared to lenders providing conventional financing. When closing an FHA mortgage, the borrower is required to pay a portion of the mortgage insurance premium up-front at the time of the close. Regardless of the down payment, this upfront premium is 1.5% of the mortgage amount. While not required to do so, most borrowers elect to finance the premium with the mortgage. The remainder of the premium is paid monthly through the borrowers' escrow account.

The Veteran's Administration (VA) does not require mortgage insurance per se, however, most VA mortgages require a funding fee that is paid in advance, usually included in the mortgage amount. The funding fee assists the Federal Government with the administrative costs of providing the program and insuring against the unfortunate event of default.

Canceling PMI
Generally speaking, PMI may be cancelled once you have attained 80% or less loan-to-value in your home. When you believe you have done so, you should contact your lender regarding their specific procedures to cancel the insurance. In most instances, you will have to have an appraisal of your home completed to confirm the value.

Initiating the cancellation of PMI is often a good time to consider refinancing an existing mortgage. While it is not necessary to refinance to eliminate PMI, lower interest rates may be available. The savings from the lower interest rate and combined with the absence of PMI may result in a significant reduction of your monthly payment.

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