What is PMI on a mortgage? Insurance the borrower pays that protects the lender, required on most conventional loans under 20% down.
PMI is an insurance premium a borrower pays on a conventional loan with less than 20% down. It insures the lender against the borrower defaulting, not the borrower against anything, which is the single most misunderstood thing about it. It typically runs a few tenths of a percent to about 1.5% of the loan a year, added to the monthly payment, and the rate depends on credit score and down payment.
It is temporary by law on a conventional loan. A borrower can request cancellation at 80% loan-to-value and the servicer must drop it automatically at 78%, based on the original amortization schedule. Paying extra principal or an appraisal showing the home has risen in value can bring the date forward, and the servicer's own rules on that are worth asking about before assuming.
FHA loans work differently and this is the reason many buyers refinance out of one: FHA charges an up-front premium plus an annual one, and on most current FHA loans the annual premium lasts the life of the loan rather than falling away at 78%.
A worked example
A $400,000 house bought with 5% down carries a $380,000 loan. PMI at 0.5% a year is $1,900, or about $158 a month on top of principal, interest, tax and insurance. It comes off automatically once the balance reaches $296,400, which is 78% of the original price, and can be requested at $304,000.
Questions people ask
How do I get rid of PMI?
Request cancellation once the loan reaches 80% of the original value, or wait for the automatic termination at 78%. Extra principal payments bring both dates forward, and some servicers will consider a new appraisal where values have risen.
Does FHA have PMI?
FHA has its own mortgage insurance, charged as an up-front premium plus an annual one, and on most current FHA loans the annual premium lasts the life of the loan. Refinancing to a conventional loan is the usual way out of it.