The Monthly Charge Most Homeowners Pay Without Fully Understanding What It Is

If you have a conventional mortgage and you put less than 20 percent down when you purchased there is a good chance you are paying PMI every month. Whether you know exactly what it is and why you are paying it is a different question and one worth answering clearly because understanding PMI is what allows you to take action to get rid of it.

What PMI Actually Is

PMI stands for private mortgage insurance. It is required on conventional loans when the down payment is less than 20 percent of the purchase price. The critical thing to understand about PMI is who it protects. It does not protect you. It protects the lender.

Homeowners insurance protects your home and your belongings against damage, theft, and liability. That coverage exists for your benefit. PMI protects the lender against the risk of loss if you default on the loan. You pay the premium every month but the lender is the beneficiary of the protection it provides.

In terms of cost PMI typically runs between 0.5 and 1.5 percent of the loan amount per year. On a $300,000 loan that range works out to $1,500 to $4,500 annually or $125 to $375 per month added to your payment. Depending on your loan amount and your specific PMI rate the monthly cost can be anywhere from fifty dollars to several hundred dollars per month.

The Good News: PMI Is Not Permanent

As Judy Miller explains the most important thing homeowners who are paying PMI need to understand is that it does not have to last forever. There are specific thresholds at which PMI can be removed and knowing them is what allows you to act rather than simply continuing to pay indefinitely.

Once you reach 20 percent equity in your home you can formally request that your lender remove the PMI. That equity can come from paying down the principal balance through your regular mortgage payments or from appreciation that has increased your home's value above what it was when you purchased. If your home has appreciated meaningfully since you bought it you may already be at or past the 20 percent equity threshold without realizing it.

Once you reach 22 percent equity federal law requires your lender to cancel PMI automatically under the Homeowners Protection Act. You do not have to request it at that point. The lender is legally obligated to remove it when your scheduled payments bring you to that threshold.

How to Get PMI Removed Before You Reach the Automatic Cancellation Point

If you believe your home has appreciated enough to push you past the 20 percent equity threshold you can request a new appraisal and submit a formal removal request to your lender. The lender will typically require that the new appraisal supports the value and that the loan is in good standing before approving the removal.

For homeowners who purchased in markets that have seen significant appreciation over the past few years this process may produce PMI removal significantly earlier than the scheduled payment timeline would have allowed. A home purchased with 10 percent down that has appreciated 15 percent in value may already have sufficient equity to support removal even if the balance has not been paid down substantially.

Loan Structures That Avoid PMI From Day One

There are also financing structures that allow buyers to avoid PMI entirely from the beginning rather than paying it and working toward removal. Piggyback loan structures that combine a first and second mortgage to keep the first mortgage at or below 80 percent of the home value. Lender-paid PMI arrangements where the cost is built into the rate rather than charged as a separate monthly fee. And loan programs like VA loans that do not require mortgage insurance regardless of the down payment amount.

If you are currently paying PMI Judy Miller wants to look at your specific numbers and determine whether you qualify for removal based on your current equity position and whether there is a loan structure that would serve you better going forward. Judy Miller is Branch Owner with Canopy Mortgage and would love to be your trusted lender. Call to find out whether you are paying PMI that you may already be eligible to remove.

Sources

ConsumerFinancialProtectionBureau.gov
FannieMae.com
Investopedia.com
MortgageNewsDaily.com
HUD.gov