Is Private Mortgage Insurance (PMI) Required?

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Lenders want to know they'll get their money back when they lend it out. In the event that a borrower can’t produce at least 20% down for a traditional loan, lenders will impose mortgage insurance on the borrower in order to protect the lender in default. Lenders turn to private insurance providers for this, hence the name -- Private Mortgage Insurance (PMI). 

Typically, borrowers pay PMI monthly and it's lumped in to their mortgage payments. These payments are only for the purpose of providing the lender with protection, and make no headway on the principal. PMI can also sometimes be paid when the loan closes as a one-time payment. Different lenders have different policies, and as such it’s important to ask what options they provide.

Is PMI required?

While there may be a special case here and there where a lender doesn't require PMI, lenders will usually impose PMI on loans where the borrower can’t produce the down payment requirement. Government loans, such as FHA loans, have a kind of mortgage insurance pre-imposed on them called a Mortgage Insurance Premium (MIP) regardless of the down payment amount.

In some instances, the mortgage insurance required by lenders becomes obsolete and can be dropped. For example, the FHA loan allows for the MIP to be dropped if the Loan-to-Value ratio (LTV) is 80%.

How much is PMI per month?

How much you pay for your lender’s insurance will vary, but it's usually somewhere around 1% of the total loan value. The cost to you is determined by the amount of your down payment, and the status of your credit. There are several ways a lender can require PMI payments to be made, the most common being a monthly premium. FHA lenders usually require a one-time payment for the total insurance cost when the loan is closed.

How do you avoid paying PMI?

When lenders decide to require PMI, they are doing it to protect themselves from default. Borrowers with bad credit and borrowers who can’t make at least a 20% down payment are typically subjected to PMI. However, borrowers who pose no risk to the lender won’t usually be faced with paying PMI. 

If you have good credit, and you can make a down payment of 20% or more, you can avoid having to pay PMI. FHA loans always have mortgage insurance imposed, though, no matter the amount of the down payment. Because FHA loans are sought by borrowers who are looking for looser restrictions, a lender with good credit and a large down payment would probably be better off seeking a traditional loan.

How do you get rid of PMI?

Private Mortgage Insurance (PMI) can be dropped off a loan after specific criteria have been met. Although the decision is up to the lender, it is typical for lenders to require the loan-to-value ratio (LTV) to be 80% before the PMI can be dropped. Each lender is different, so make sure you know what you’re getting yourself into before closing the deal. 

What is a Mortgage Insurance Premium (MIP)?

There are several types of mortgage insurance that can be imposed by lenders, and FHA loans require a specific insurance called a Mortgage Insurance Premium (MIP). The MIP is a payout directly to the Federal Housing Administration (FHA) rather than a private company as a Private Mortgage Insurance (PMI) is.

The MIP is typically required to be paid in a partial lump sum when the loan is closed, and as additional monthly premiums that can extend the lifetime of the loan. In some cases where the borrower doesn’t have the funds to pay the initial premium, the cost can be spread across the loan payments. This increases the loan payment costs, but spares the borrower from the initial payment.

When can you drop PMI on an FHA loan?

In January, 2017, the Housing and Urban Development Department (HUD) changed Mortgage Insurance Premiums (MIP) rates for FHA loans. Whether or not you can ever drop the MIP from your FHA loan depends on how much the loan is for, the duration of the loan, and the Loan-to-Value (LTV) ratio.

On loans with terms of less than fifteen years, an LTV of less than 90% will mean that the running time of the MIP is only 11 years. In any other case where the loan term is less than fifteen years, the MIP runs for the entire duration of the loan.

Loan with a term of more than fifteen years have a little more leeway. On loans less than $625,500, the MIP duration can be shortened to 11 years if the LTV is less than 90%. Loans over $625,500 can have an MIP duration of 11 years when the LTV is less than 90%, but the amount you pay is variable based on the LTV.

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