Fact: The majority of Americans can’t afford the coveted 20% down payment when it comes time to buy a house.
According to the National Association of REALTORS®, “88% of recent buyers financed their home purchase. Those who financed their home purchase typically financed 87%.”
That means the average down payment was roughly 13%.
There’s no shame in a down payment of less than 20% on a conventional loan, but it does mean you have to pay private mortgage insurance (PMI). The upside is that mortgage insurance gives you a lot more buying power because you don’t have to bring as much money to the table in the form of a down payment. The downside is that it’s an additional item tacked on to your mortgage payment every month.
What Is PMI And Who Does It Protect?
PMI is a type of mortgage insurance required on all conventional loans backed by Fannie Mae or Freddie Mac for one-unit primary homes or a second home where the down payment made is less than 20%. The down payment or equity amount can change if you have more units in your primary home or an investment property, but we’ll cover that below.
PMI allows the lender to let you purchase a home with a lower down payment or refi with less equity because the insurance policy helps cover the lender’s losses in case you default. In the event of a foreclosure, the mortgage insurer makes a payment to the lender or mortgage investor covered under the policy.
Mortgage insurance is strictly for the benefit of the lender and not the person buying or refinancing. Mortgage insurance is sometimes confused with mortgage life insurance (a type of policy which pays off the mortgage in the event of the client’s untimely passing), but it’s important to note that these aren’t the same. From the point of view of the person getting the mortgage, the good thing about mortgage insurance is that it enables them to get a loan without needing to liquidate their savings to afford a down payment of 20% or more.
How Much Is Mortgage Insurance?
The actual cost of mortgage insurance is based on several factors. To begin with, lender-paid mortgage insurance (LPMI) is more expensive for a comparable amount of coverage than a similar amount of borrower-paid mortgage insurance (BPMI) coverage would be. We’ll explain the difference between these two options in a minute.
Beyond that, the cost for coverage is all based on risk factors. The cost of coverage will depend on factors like your down payment or equity amount, your property type (primary, vacation, investment, etc.), debt-to-income ratio (DTI) and whether you’re taking cash out. Also considered are your median FICO® Score and the term of your loan. Finally, adjustable rate mortgages (ARMs) are also considered a bigger risk than fixed-rate mortgages so the PMI will be slightly higher with those.
To give you an idea of how much you can expect to pay for mortgage insurance, let’s take an example from major mortgage insurance provider MGIC. When you read this chart, you’re going to see something called LTV. This stands for loan-to-value ratio and you can think of it as the inverse of your down payment or equity amount. For example, your LTV would be 97% if you had a down payment of 3%.
For this scenario, let’s assume your lender has determined you need the maximum coverage amount of 35% based on having a 3% down payment. Further, let’s also assume you have a credit score of 750. This is a $300,000 30-year fixed-rate loan with BPMI.
By looking at the first table on the sheet, we see that the BPMI price for our scenario is 0.7%. This means that your annual mortgage insurance cost is 0.7% of your overall loan amount. This is divided into monthly payments so that your monthly cost is actually $175 ($300,000 × 0.007 equals $2,100/12 = $175).
It’s worth noting that, although we based this example on public rate sheets, lenders negotiate their own rates with mortgage insurers. Therefore, the mortgage insurance cost is certainly something to consider when comparing lenders. Quicken Loans® is able to get some of the lowest rates available in the industry for our clients for both BPMI and LPMI.1
How Long Do You Have To Pay Mortgage Insurance?
There are three different ways to pay for private mortgage insurance. Let’s run through those real quick.
BPMI is the most straightforward. It’s a monthly fee added on to your mortgage insurance that can be removed once you reach 20% equity in your home.
LPMI programs like PMI Advantage allow you to avoid a monthly mortgage insurance payment in exchange for paying a slightly higher interest rate than you would on a loan without LPMI. It’s important to note that this higher interest rate sticks around for the life of the loan. Depending on market conditions at the time, you may be able to save money in a couple years by refinancing at a lower rate without mortgage insurance once you reach at least 20% equity in your home.
There’s a third option that’s a variation of LPMI where you pay for part or all of the PMI policy at closing. If you make a partial payment, you’ll get a lower interest rate with LPMI. If you pay for the whole policy, you’d get a rate identical to the one you’d receive if you weren’t paying LPMI, but it would be without the extra monthly payment associated with BPMI.
If you couldn’t avoid PMI with a 20% down payment, don’t worry: BPMI payments will eventually go away either on their own or through a more proactive approach.
How To Get Rid Of PMI On Conventional Loans
Conventional loans are the most flexible type of loan, allowing borrowers to purchase the greatest range of properties. However, this variety means there are a lot of variables that come into play in determining when (or if) mortgage insurance can be canceled.
One thing to note is that unless your mortgage insurance automatically cancels based on one of the scenarios below, the Homeowners Protection Act requires that your request be in writing. Because of this, we advise Quicken Loans clients that the best thing to do is give us a call at (800) 508-0944 to verify whether you might be eligible before jumping through a ton of hoops.
Below is a chart that will help you determine whether you’re eligible to get rid of PMI on your conventional loan, but we’ll go deeper on specifics in the coming sections.
One-Unit Primary Residence Or Vacation Home
If the residence is a single-family primary home or second home, your mortgage insurance will be canceled automatically in one of the following scenarios (whichever happens first):
- The LTV on your property reaches 78% which means you’ve earned 22% equity in your home based on the original amortization schedule (and you didn’t make extra payments to get it there).
- You reach the midpoint of your mortgage term (year 15 on a 30-year mortgage, for example).
If you don’t want to wait for your PMI to auto-cancel, you have some options. When your LTV reaches 80% through payments, you can request cancellation. In most cases, you’ll have to get a new appraisal in order to verify that your home didn’t lose value since closing.
Fannie Mae and Freddie Mac both allow you to make extra payments in order to get to 80% sooner. If you don’t know whether your conventional loan is held by Fannie Mae or Freddie Mac, you can use these lookup tools.
If you’ve made substantial home improvements to increase your equity by increasing your property value, Fannie Mae requires that you have 80% or less LTV before they’ll take off mortgage insurance, as does Freddie Mac. All improvements have to be called out specifically in a new appraisal.
If you’re requesting removal of your PMI based on natural increases in your property value 2 – 5 years after your loan closes, both Fannie Mae and Freddie Mac require a new appraisal, and the LTV has to be 75% or less. If your removal request comes more than 5 years after your closing, the LTV can be 80% or less with a new appraisal. These requirements apply to insurance removal based on market value increases not related to home improvements.
Multi-Unit Primary Residence Or Investment Property
If you have a multi-unit primary residence or investment property, things are a bit different. With Fannie Mae, mortgage insurance goes away on its own halfway through the loan term. By contrast, Freddie Mac does not auto-cancel mortgage insurance.
You can cancel PMI on your own when LTV reaches 70% based on the original value with Fannie Mae. Freddie Mac requires 65% for cancellation.
The requirements for Fannie and Freddie are the same if you want to have a new appraisal done to show a lower LTV. This is true whether the lowered LTV is based on a natural market-based increase in home value or home improvements. Keep in mind that if you’re requesting removal based on home improvements from Fannie Mae, you must have had the loan for at least 2 years prior to requesting PMI removal on your investment property.
Other Types Of Mortgage Insurance
So far we’ve talked about private mortgage insurance when it comes to conventional loans because that’s the type that goes away after a while depending on how long you’ve been paying on your loan and your equity.
However, there’s mortgage insurance (or its equivalent) associated with two other types of loans: FHA and USDA. They have different structures and are harder to cancel, although it’s not always impossible.
FHA Loans: How To Get Rid Of Mortgage Insurance Premiums (MIP)
MIP is like PMI in that it’s mortgage insurance, but it’s associated with FHA loans. Unlike PMI where rates are negotiated by interactions in the market, mortgage insurance premiums on FHA loans are set by the government.
If you have an FHA loan, you pay a portion of the premium up front at the close of the loan and then continue to pay mortgage insurance premiums (MIP) on a monthly basis. The upfront premium is always 1.75% of the loan amount. If you can’t afford to pay this at closing, it can be financed into your loan amount.
In addition to the upfront premium, there’s an annual premium that’s based on your loan type as well as your down payment or equity amount. If you have a standard FHA loan with a 3.5% down payment on a loan of no more than $625,500, the annual MIP is 0.85% broken into monthly payments.
Meanwhile with an FHA Streamline where you go from one FHA loan to another for the purpose of lowering your rate and/or changing your term, the MIP rates are a little better. In this case, there’s an upfront rate of 0.01% of your loan amount and an annual MIP rate of 0.55%.
Unfortunately, if you purchased or refinanced with an FHA loan on or after June 3, 2013 and you had a down payment of less than 10%, MIP lasts for the term of the loan. With down payments of 10% or more, you still have to pay MIP for 11 years.
If you haven’t purchased or refinanced with an FHA loan since June 3, 2013, the outlook is a little better. On a 15-year term, MIP is canceled when your LTV reaches 78%. For longer terms, the LTV requirement remains the same and you have to pay MIP for at least 5 years.
There’s one other way to stop paying these premiums if you’re currently in an FHA loan. Assuming you meet the other qualification factors (e.g. at least a 620 median FICO® score), you can refinance into a conventional loan and request mortgage insurance removal once you reach 20% equity in your home.
USDA Loans: How To Stop Paying Guarantee Fees
USDA loans originated through private lenders and guaranteed by the USDA have what are known as guarantee fees that function like mortgage insurance. These rates are also set by the government but the rates are lower than comparable FHA loans.
The upfront guarantee fee is 1% of your loan amount, either paid at closing or refinanced into the loan. The annual guarantee fee is equal to 0.35% of the average unpaid principal balance based on the original amortization schedule without making any extra payments.
The downside here is that guarantee fees live for the life of the loan. The only way to get rid of them is by refinancing into a conventional loan and requesting PMI removal after you reach 20% equity.
This isn’t common, but there are cases in which you can receive your loan directly from the USDA. In these instances, there are no guarantee fees.
Final Notes On Cancelling PMI And MIP
There are a couple additional things to know about mortgage insurance cancellation. In order for mortgage insurance to auto-cancel, you have to be current on your payments. If you want to request a cancellation yourself, you can’t have had a 30-day late payment in the last year. You also can’t have had payments more than 60 days late in the past 2 years.
If you’re in a conventional or FHA loan and feel you might qualify to remove PMI or MIP as a Quicken Loans client, we recommend you reach out to our servicing team at (800) 508-0944. If you’d like to look into your options to buy with or refinance into a conventional loan and eventually avoid mortgage insurance altogether, you can get started online with Rocket Mortgage® by Quicken Loans or give us a call at (800) 785-4788 to speak with one of our Home Loan Experts. If you have any questions, you can leave them for us in the comments below.
1BPMI monthly and LPMI single rate data is compared to publicly published private mortgage insurance rates.
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