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Default risk impacts all parties in a home loan. The mortgage note holder may lose hundreds of thousands of dollars, while the borrower may face foreclosure, lose the house, and experience difficulties accessing affordable credit for many years. Private mortgage insurance (PMI) is one tool used to lower the stakes in mortgage lending.
Learn what PMI is for, how it affects your finances and how to use it to your advantage.
Who Uses Private Mortgage Insurance?
PMI is mortgage insurance meant to financially protect the lender against default risk when you take out a conventional loan without paying at least a 20% down payment.
Putting down a small amount means your lender has to finance a larger portion of the property’s sale price. Foreclosing a house often means selling at a loss. The narrow gap between the property’s appraised value and the mortgage principal doesn’t give the lender enough room to sell the asset at a discount and recoup 100% of their capital.
A PMI policy ensures your lender gets adequately paid if you default on the mortgage until the gap between the house’s appraised value and principal balance becomes wide enough.
What’s the Difference Between PMI, MPI and MIP?
MPI stands for mortgage protection insurance, sometimes called mortgage life insurance. MPI covers your outstanding mortgage debt if you die or become disabled or critically ill. MPI ensures your lender gets fully paid, removes the liability from your estate and absolves your survivors from the responsibility for repaying the debt.
PMI and MPI aren’t mutually exclusive. They cover mortgage debt in different scenarios, and you can have both policies simultaneously.
MIP is short for mortgage insurance premium. It’s the PMI equivalent of FHA loans, neutralizing default risk. The difference is that MIP is mandatory regardless of the down payment size, and you most likely have to pay for it until your FHA loan matures. MIP involves up-front and recurring premiums. You can pay the up-front premium at closing or roll it into your mortgage, while the recurring premiums are annual fees payable in 12 monthly installments.
What Is the Benefit of PMI?
The main benefit of PMI to borrowers is a higher likelihood of loan approval. This insurance helps you qualify for a mortgage without putting 20% down on your home purchase. It shortens your path to homeownership, allowing you to increase your net worth with every mortgage payment.
Saving for a sufficient down payment can be a lengthy endeavor. A 2024 Zillow study found that a median-income household needs to put roughly $127,750 down — or 35.4% of the value of a typical home in an American metropolitan area — to afford mortgage payments comfortably. In expensive markets, it could take about 24 years to hit this target. Rising home prices and stagnant wages render this financial goal unattainable.
PMI impacts home affordability, but there’s an opportunity cost to putting off a home purchase. You may miss out on a chance to build wealth passively through steady property appreciation.
In 2023, PMI helped about 800,000 borrowers qualify for conventional loans with down payments as low as 3%. Sixty-four percent were first-time homebuyers, and almost 35% earned below $75,000 annually.
Agreeing to PMI isn’t the only way to qualify for a mortgage you otherwise might not be able to get. Taking out a second mortgage lets you source enough funds to bridge the gap between your down payment and the 20% requirement. This alternative means you must pay two sets of closing costs and monthly mortgage payments, which can be burdensome.
Who Pays for Private Mortgage Insurance?
Borrowers generally shoulder the PMI premiums. Many pay by installment, but you can make a lump-sum payment instead of monthly. Alternatively, you can split the premium by making up-front and recurring payments.
Some lenders agree to foot the bill in exchange for charging slightly higher interest. In this arrangement, your lender is insured, and you keep your monthly mortgage payments low.
The caveat is that lender-paid private mortgage insurance isn’t subject to cancellation. The interest doesn’t turn into a lower rate, regardless of your home equity or amortization schedule, trading long-term savings for long-term mortgage repayment affordability.
How Much Is PMI Monthly?
Your monthly PMI premium depends on the size of your down payment, credit scores and mortgage program. Lenders negotiate with private mortgage insurance providers and set specific rates for different borrowers. Generally, borrowers with a 620 credit FICO score only qualify for the highest rate, while those with very good credit can get the most favorable one.
The average annual PMI premium ranges from 0.46% to 1.50%. At these rates, PMI on a $450,000 mortgage would be $2,070 to $6,750 yearly or $172.50 to $562.50 monthly. Constant renewal PMI policies base the annual premium on the original loan amount, whereas declining ones recalculate the premium using the unpaid balance.
Does PMI Go Away Automatically?
Mortgage servicers should stop charging PMI premiums once the principal balance reaches 78% of the property’s original home value. The original home value could be the contract sales price or the appraised value at the time of purchase.
If your property depreciates significantly since the date of purchase, your servicer should cancel the PMI the month after your loan reaches the midpoint of its term.
Scheduled PMI termination happens automatically, so you don’t have to request it. The only condition is that you should be current on your payments. Otherwise, you must settle your past-due balance first to end the mortgage insurance.
Mortgage prepayment is a sound strategy to cancel PMI ahead of schedule. The law obliges your servicer to terminate your insurance if you:
- Request in writing.
- Have a good payment history.
- Are not delinquent.
- Confirm there are no junior liens on your home.
- Prove your property hasn’t depreciated below its original value.
Do You Ever Get PMI Money Back?
PMI premiums paid in full at closing may be partly refundable under certain circumstances. If you cancel the policy before it matures, you may be entitled to a refund of any unearned premiums. For example, causing your principal balance may reach 78% of your property’s original value sooner by making extra mortgage payments may help you get some of your money back.
Attain Homeownership Using Private Mortgage Insurance
PMI may protect your lender instead of you, but it’s not meritless. It’s a means to an end, and in this day and age, homeownership will be unattainable for most without it.
About The Author
Evelyn is the founder and editor-in-chief of Renovated with over 5 years of experience immersed in researching and writing on interior design, construction, and renovation. She is a passionate advocate for improving mental health and safety in the construction industry. When she's not writing, you can find her reading at coffee shops around PA.
Her insights have resonated far beyond Renovated, gracing publications like the National Association of Realtors, Construction Executive, Fieldwire, DecorMatters, and Renewable Energy Magazine.
For more sharp takes on design, construction, and everything in between, you can check out Evelyn's portfolio, https://evelynlong.com/.
