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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 lenders protection against the borrower defaulting on the loan. It allows lenders to offer financing with lower down payments at reasonable rates.

The cost of PMI is dependent on the size of the down payment and your FICO score. There are two common types of Private Mortgage Insurance.

  • 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 cancelled 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

  1. 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.
  2. The borrower pays for a new appraisal, to be ordered by the lender/servicer.
  3. 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)
  4. Request must be made in writing.

Early cancellation based on current appreciated property value

  1. At least two years have passed since the loan was originated.
  2. 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.
  3. The borrower pays for a new appraisal of the property, to be ordered by the lender/servicer.
  4. The remaining principal balance is no more than 75% of the current property value if 2-5 years have elapsed since the origination date or 80% of the current property value if five or more years have elapsed since the origination date. (70% LTV for 2-4 unit primary residence or 1-4 unit investment property for Fannie Mae, 65% for Freddie Mac)
  5. Request must be made in writing.
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