What You Need to Know About Private Mortgage Insurance

Everything You Need to Know About PMI

Your monthly mortgage payment is more than just principal and interest. Many homeowners include their property taxes and insurance bills in their monthly mortgage payments, too. Some homeowners have one more charge rolled into their monthly payment: PMI, or private mortgage insurance. Don’t make the mistake of not factoring in your mortgage insurance payments when planning a move!

What Is PMI?

Though many homeowners pay PMI, few understand how it works. PMI is required on conventional loans when homeowners are not able to put down 20 percent or more. It is not required on FHA or VA loans (they have their own insurance and insurance rules). PMI protects the lender—not the borrower—in the event that the homebuyer defaults on the loan. How much your mortgage insurance is will vary based on the amount you put down, your credit score and other property specific factors.  The typical range I see is 0.4% - 1.25% of the loan annually.  Or on a $200,000 loan between $67 and $208 a month.  That’s a big range right?  That’s why you need to consult a mortgage professional early on in the process.  Luckily, I can recommend some of the best in the business!

How Do I Cancel PMI?

Because it is a charge that only benefits the lender, not the homeowner, it’s important to know when it’s possible to cancel PMI and reduce your monthly mortgage bill. But canceling PMI isn’t easy. There are different rules for different lenders.

Some lenders are chartered in Minnesota. They are subject to Minnesota’s PMI laws. In Minnesota, you can request a cancellation of your PMI once the equity in your home reaches 20 percent. That’s the difference between balance of principal on the loan and the value of your home. Imagine you paid $100,000 for your home three years ago. Today, it’s worth $130,000. It’s appreciated 30 percent, and you’ve also paid down your mortgage principal in the last three years. You are likely eligible to have your PMI cancelled.

But federally chartered lenders are not subject to Minnesota’s rules. Instead, there are federal laws that determine when they can cancel PMI. Federal laws do not use a home’s appreciation like Minnesota does. Instead, federal laws look at only the principal you’ve paid. So, if you paid $100,000 for your home, you would have to pay down $20,000 of the principal on your loan before PMI could be canceled. That’s true even if your home’s value has gone up.

Whether your lender is federally chartered or chartered in Minnesota, you’ll have to apply to have your PMI cancelled. You are only eligible if you have had the loan for two or more years, have a history of good payments, and are current on payments. You must apply to your lender in writing. Often, an appraiser must come to the home to determine a market value. PMI must be canceled if the principal balance is 78 percent of the original loan amount or if you are halfway through the life of the loan. If you have a good mortgage person you should be able to give them a call and they can walk you through the process. 

PMI is one of the more confusing details of home ownership. To help you understand your mortgage payment and why PMI is required, contact Brooks Johnson, your friend in real estate, today.