Private Mortgage Insurance (PMI)
Private Mortgage Insurance is required when putting less than 20% down on a new home purchase with a conventional loan. PMI is the lender’s protection against the borrower defaulting on the loan. It allows lenders to offer financing with lower down payments at reasonable rates.
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Understanding Private Mortgage Insurance (PMI)
Monthly Private Mortgage Insurance
Commonly referred to as monthly PMI, the borrower pays a monthly premium in addition to their mortgage payment and the mortgage servicer passes the monthly premium on to the PMI Company. Once the PMI is removed the borrower is left with the same low rate they would have had if they put 20% down originally. Options for removing PMI are shown below.
Lender Paid Mortgage Insurance
The borrower takes a slightly higher interest rate and the lender pays a one-time upfront mortgage insurance premium to the PMI Company. This one-time payment eliminates the need for monthly mortgage insurance. LPMI generally provides a lower initial monthly payment when compared to borrower paid PMI and depending on income levels provides some tax advantages when compared to monthly PMI.
Below are Fannie Mae and Freddie Mac guidelines for PMI removal.
PMI is automatically canceled when the LTV reaches the scheduled 78% date based on the original amortization schedule. The loan must be current for the automatic cancellation to occur.
Early cancellation based on the original property value
- The loan has an acceptable payment record, defined as no payment 30 days or more past due in the last 12 months and no payment 60 days or more past due in the last 24 months.
- The borrower pays for a new appraisal, to be ordered by the lender/servicer.
- The remaining principal balance is no more than 80% of the lesser of the original property value or the current appraised value. (70% for an investment property for Fannie Mae, 65% for Freddie Mac)
- A list of additional documents needed to complete the final approval.
Early cancellation based on the original property value
- The loan has an acceptable payment record, defined as no payment 30 days or more past due in the last 12 months and no payment 60 days or more past due in the last 24 months.
- The borrower pays for a new appraisal, to be ordered by the lender/servicer.
- The remaining principal balance is no more than 80% of the lesser of the original property value or the current appraised value. (70% for an investment property for Fannie Mae, 65% for Freddie Mac)
- A list of additional documents needed to complete the final approval.
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FAQ
Private mortgage insurance is insurance required on a conventional loan when the down payment is less than 20% on a new home purchase. It protects the lender if the borrower defaults on the loan.
PMI is typically required when a borrower puts less than 20% down on a conventional home purchase.
The cost of PMI depends on the size of the down payment and the borrower’s FICO score.
Monthly private mortgage insurance means the borrower pays a monthly premium along with the mortgage payment, and the mortgage servicer sends that premium to the PMI company.
Lender-paid mortgage insurance means the borrower accepts a slightly higher interest rate and the lender pays a one-time upfront mortgage insurance premium to the PMI company. This removes the need for a separate monthly mortgage insurance payment.
With monthly PMI, the borrower pays a separate monthly premium. With lender-paid mortgage insurance, the borrower takes a slightly higher interest rate instead of paying monthly mortgage insurance.
PMI is automatically canceled when the loan-to-value ratio reaches the scheduled 78% date based on the original amortization schedule, as long as the loan is current.
Early cancellation based on the original property value generally requires an acceptable payment record, a new appraisal ordered by the lender or servicer and paid for by the borrower, a remaining principal balance of no more than 80% of the lesser of the original property value or current appraised value, and a written request. For certain investment properties, lower thresholds may apply under Fannie Mae and Freddie Mac guidelines.
Early cancellation based on current appreciated value generally requires that at least two years have passed since origination, the loan has an acceptable payment record, the borrower pays for a new appraisal ordered by the lender or servicer, the remaining principal balance meets the required loan-to-value limit, and the request is made in writing.
Yes. For early PMI cancellation, the borrower pays for a new appraisal, and the appraisal is ordered by the lender or servicer.
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