How to say goodbye to PMI
Not every homebuyer can afford a down payment of 20 percent or more. That makes mortgage lenders nervous, which is why many require borrowers to pay for costly private mortgage insurance (PMI).
Fortunately, a borrower can eliminate PMI in a handful of different ways. But it’s important to know what’s involved and how to meet the lender’s requirements to avoid paying PMI for longer than necessary.
“PMI is a specific type of insurance often required when a buyer utilizes a conventional home loan,” says Benjamin Mizes, CEO of St. Louisbased Clever Real Estate. “For most conventional loans, PMI is required when you have a down payment less than 20 percent. Lenders require PMI to protect them in case you can’t afford to pay your mortgage, the loan defaults and the home eventually goes into foreclosure.” In these circumstances, PMI prevents
the lender from losing money.
“After the home is foreclosed upon, the lender will then sell the property. The difference between what the lender sells the property for and what is owed is the deficiency. The lender will request payment from the PMI company, for most, if not all of that deficiency,” explains Gerald E. Robinson, broker-owner of 1st Choice Mortgage Company in Meridian, Idaho.
PMI costs, which can be paid upfront, monthly or through a combination of both, commonly range from 0.5 percent to 1.5 percent of the original loan amount, according to Mizes.
“For a home worth $300,000 and a PMI rate of 0.5 percent, you might pay $1,500 a year toward PMI,” says Mizes. “Over the course of your loan, that can be a lot of money.”
Robinson notes that PMI rates can also vary based on your FICO credit score, debt-toincome ratio and number of borrowers on the loan.
“A borrower with a 740 FICO score who puts 10 percent down on the home but has two borrowers on their $200,000 loan will have a lower PMI rate than a single borrower with a 680 FICO score who puts 5 percent down on a similar $200,000 loan. The latter might pay $160 a month versus the former who might pay only about $52 a month,” Mizes adds.
In any scenario, the PMI payments can be a drain on the borrower’s finances — all the more reason to work toward eliminating it as soon as possible. Here are a few ways to accomplish this goal:
1. Meet the minimum down payment required by the lender. Some lenders require less than 20 percent down to avoid PMI — for example, for a 10 percent down payment the minimum credit score would be around 730, Mizes says. “You can also pursue a down payment assistance program in your area that may be able to get you into a home with little to no money needed for a down payment and no PMI required,” Robinson says.
2. Pay the entire PMI cost upfront in one lump sum, either in cash at closing, or by rolling the cost into your loan amount. This option means you’ll never have to pay PMI payments again on the same loan.
3. Pursue a splitpremium PMI whereby you pay a percentage of the entire PMI amount in a lump sum during closing and then pay the remaining balance in monthly installments.
4. Request a lenderpaid PMI (LPMI).
In this scenario, your lender pays the mortgage insurance for you but raises your mortgage rate to cover its costs. You may pay less per month with this option than if you pay for PMI yourself; however, LPMI can’t be canceled, so it’s probably best for borrowers who don’t plan to keep the mortgage for more than a few years.
5. Wait until you’ve accrued 22 percent equity in your home (when your loan principal falls to 78 percent of your home’s value, which can often take 11 years or longer). At this point, PMI should cancel automatically. Laura Endres, attorney with Taylor, Eldridge and Endres, P.C. in Smithtown, N.Y., says that you can ask your lender for PMI to be removed at 80 percent. “If you fail to do so, you are making up to two extra years of payments,” she says, adding that there is no exact percentage at which PMI ceases. “Each bank has different requirements.”
6. “Sometimes it makes perfectly good sense to put less money down and pay the PMI monthly, especially if you want to keep cash on hand for financial emergencies and unforeseen costs associated with buying a home,” says Jeremy Sopko, CEO of Cleveland-based Nations Lending. “Remember that PMI isn’t evil — it enables you to finance a home even if you lack the necessary down payment.”