Mortgage Insurance Options

responsible borrowing

Private mortgage insurance affords an opportunity for first-time or repeat homebuyers to purchase a property without saving for years to accumulate a 20% down payment. 

There are specific questions that you may have regarding mortgage insurance. Keep reading to shine some light on areas that may be confusing about mortgage insurance! 


How Long Do Borrowers Have to Pay for PMI? 

The easiest explanation for this is that borrowers have to reach 20% equity in their home. The timing for how long this takes depends on the specific financial situation. 

Typically, borrowers pay for private mortgage insurance for 5-8 years. There are two factors that can reduce the amount of time that PMI is required. The first is the amortization period, or the schedule of mortgage payments. The borrower can stay ahead of this schedule by paying additional principal on a monthly or periodic basis. This shortens the time it takes to reach 20% equity.

The second factor is home-price appreciation. Although appreciation tends to be dependent on economic and housing market swings, in many instances it decreases the length of time that mortgage insurance is required.


Can Borrowers Cancel Mortgage Insurance?

Once a borrower reaches 20% equity in their home, they can ask their servicer to cancel their private mortgage insurance. In some situations, the servicer may require a new appraisal to confirm that the borrower has reached the 20% equity threshold. 

Another way that a borrower can remove PMI is through the refinance process. If they have at least 20% equity in their home when they refinance, private mortgage insurance won’t be required on the new loan.

Conventional VS. Federal Housing Administration Loans

It is important to keep in mind that the rules for removal of private mortgage insurance are different for conventional loans than they are for Federal Housing Administration (FHA) loans. Private mortgage insurance is required on FHA loans for at least eleven years. FHA loans also have an upfront premium of 1.75%, while conventional loans have no requirement.


What Are Upfront Options for Mortgage Insurance?

There are two types of monthly borrower-paid premiums. These are typically referred to as standard monthly premiums and deferred monthly premiums.

With the standard option, the borrower pays the first monthly premium at closing. On the other hand, the deferred monthly option delays the initial PMI payment until the borrower makes their first loan payment. There is no private mortgage insurance premium due at closing, which results in lower upfront costs for the borrower.

It’s important to note that the standard monthly and zero monthly options have the same premium rates, meaning the price is the same. The two options simply differ as to when the first PMI payment is made.


Do Revised Premiums Exist?

Inquiries about re-pricing a private mortgage insurance premium is a common question. Mortgage insurance premiums are based on the loan characteristics at closing. The only way for borrowers to lower their premiums is to refinance into a new loan that reflects a lower loan-to-value (LTV.)


Bottom Line

Although mortgage insurance is an additional cost for some borrowers, its benefits outweigh the price tag for those who could not otherwise afford to purchase a home. Plus, paying for PMI is not a lifelong commitment. So, reach out to your loan officers for guidance when considering private mortgage insurance options. They are there to help you!