In New York, everyone is familiar with having to put down 20% of the property’s purchase price. However, what most are not familiar with is that private mortgage insurance on a mortgage (PMI) remains an option for those who can’t come up with the 20% upfront.
What is PMI Payment?
- A borrower buys a Private Mortgage Insurance (PMI) to protect the lender in the case of a missed payment.
- This insurance remains required for a conventional loan with less than 20% down.
- The cost of PMI ranges from 0.5% to 1% of the loan amount.
- Payments are usually monthly.
- You can stop PMI payments once the bank’s requirements are satisfied. It usually means 78% of your principal paid off, assuming no late or missed payments.
- PMI remains a good fit for you to keep more liquid assets instead of putting 20% assuming but have enough income to make higher monthly loan payments.
What is PMI?
A PMI, known as private mortgage insurance, protects the bank if you happen to stop paying back your mortgage. Lenders require this from buyers whose loan is over 80% of the property value. Purchasers who are cannot or do not want to put 20% down purchase a PMI. For the bank, it is a riskier loan. The bank will disclose your monthly PMI in either your the loan estimate and the closing documents.
What is the Cost of PMI (Private Mortgage Insurance on Mortgage)?
It ranges from 0.5% to 1% of the loan amount yearly, depending on your credit score. For example, if you have a 1% PMI fee on a $500,000 loan, you would be paying an extra $5,000 a year or $416 a month on top of the regular mortgage payments. The cost gets added to your regular monthly mortgage payment. However, borrowers can also purchase single PMI, paid as part of the closing costs, or financed into the loan. Not all banks allow that format.
The cost of PMI depends on several factors:
- Size of the mortgage.
- Downpayment amount. The higher the downpayment is, the lower the PMI.
- FICO score. PMI will cost more if you have a lower FICO.
- Type of mortgage. PMI may cost more if you have an ARM because it s riskier.
- Your Loan to Value Ratio (LTV).
How Does PMI Work?
Once agreed, the bank arranges PMI via their insurance providers. They notify you how many PMI payments you will owe and for how long. The borrower makes those payments monthly on top of the mortgage.
Is PMI Tax-Deductible?
Yes, with the Further Consolidated Appropriations Act, 2020, those payments are tax-deductible. However, borrowers can only take the PMI deduction if you itemize your deductions, and you might be losing money if your total itemized deductions are less than the standard deduction amount.
When Can You Stop Paying PMI?
You can request to remove PMI in writing. Banks will cancel them if you have met the following criteria:
- The loan balance became less than 80% of the loan’s balance (or 80% of the home’s current value).
- You made consistent and timely payments, and your loan is current with payments.
- You do not have any second mortgages.
An appraisal is sometimes useful to prove that the home’s value has not decreased below the original cost.
When are mortgage lenders required to cancel?
Banks must cancel PMI once you meet the following criteria:
- The loan amount has reached 78% of its original value.
- The borrower has a good track record with payments.
- The loan is not high-risk.
Calculate Your PMI (Private Mortgage Insurance on Mortgage)
The PMI depends on the LTV (“Loan to Value”). Once you have this LTV, you can look at your bank’s PMI chart to see the percentage of PMI you will pay. Then, you would multiply by the loan amount still owed to the bank to find your annual PMI rate. For example, if you have to pay 0.75% PMI, you multiply by the mortgage amount (say $500,000), and you get $3,700 per year or 312$ monthly.
How to Avoid PMI (Private Mortgage Insurance on Mortgage)?
You don’t want more money paid tacked on to your already expensive mortgage.
- Save money towards that 20% downpayment. Therefore you avoid PMI and decrease your mortgage interest rate.
- Pay a higher interest rate. Smaller down payments pay a higher interest rate (instead of a PMI).
- Get an 80-10-10 loan, aka piggyback loan. This structure allows you to buy a property with two mortgages totaling 90% of the purchase price. The first loan covers 80% while the other loan finances the 10% down payment.
- Apply for a VA loan. A Veterans Affairs loan requires mortgage insurance. FHA loans do not charge PMI but have their types of mortgage premiums.
- Apply to FHA loans. With those loans, mortgage insurance becomes required through government rather than a private. You can remove MIP or Mortgage Insurance Premium from an FHA loan after 11 years, provided you have initially put more than a 10% down. You cannot use FHA loans for the purchase of co-ops, and very few condos allow you to go through the vetting process required for FHA approval. As a result, the list of condo buildings approved for FHA is tiny. This applies more towards a single-family home or townhouse.
- Refinance the loan. If your new mortgage’s LTV is lower than 80%, you can eliminate PMI as well as lower the interest on the loan due to refinancing.
What is the difference between MIP and PMI?
MIP is managed by the federal government and comes with restrictions. For example, the FHA has maximum loan limits lower than those with PMI. FHA insurance remains for the total duration of the loan. You cannot remove PMI from a loan.
Pros and Cons of PMI (Private Mortgage Insurance on Mortgage)
Weigh all options before deciding!
- Buy a property with a lower down payment.
- You get more availability with your money. if you need more money for furniture or fix-ups
- PMI remains temporary. You can cancel your PMI after some time.
- PMI is an additional monthly cost. Indeed, PMI usually costs from 0.5%-1% of the total annual loan amount (on top of your mortgage and fees.)
- PMI only protects the bank. This PMI does not protect the purchaser, but only the bank.
- It is sometimes challenging to cancel. You can cancel PMI after you pay off 20%. However, you must send a written cancellation notice as with an official appraisal before removing the PMI.
The 4 Different Types of PMI (Private Mortgage Insurance on Mortgage)
- Borrower-paid PMI (BPMI). The most basic of PMIs. The PMI gets added to your mortgage, and you can cancel it. BPMIs represent a fixed rate throughout your loan.
- Lender-paid PMI (LPMI): Your lender will front the cash for your mortgage insurance at a higher mortgage rate. You cannot cancel this type of insurance.
- Single premium PMI (SPMI). No monthly payments in this case as you pay the premium upfront. Of course, it is non-refundable.
- Split premium PMI. It is a combination of BPMI and SPMI. In other words, you pay part of the coverage in a lump sum at closing, and the rest monthly.
What is the Best Type of PMI (Private Mortgage Insurance on Mortgage)?
It remains the one that works best for your situation, goals, and budget. For example, if you don’t plan on moving or refinancing, you might want to explore buying out their mortgage insurance with LPMI or a borrower-paid single premium. Meanwhile, if your future is less predictable, you may prefer the basic borrower-paid PMI as it provides the lowest risk.