What Is Private Mortgage Insurance?

Many homebuyers balk at the thought of putting 20% down on a new house. The good news is most first-time buyers make a much smaller down payments, but you’ll probably have to pay private mortgage insurance (PMI) as a result.

PMI protects your lender if you default on mortgage payments, and it’s generally required on conventional loans where the down payment is less than 20% of the home’s total cost.

Here’s what you need to know about mortgage insurance, including how much it costs and how long you have to pay it.

Generally, this type of insurance applies in situations where the borrower is making a small down payment — for conventional mortgages, down payments smaller than 20% generally require private mortgage insurance.

Most mortgage insurance requires you to pay a monthly fee, and there may also be some costs added to your closing costs, or the fees you pay when you finalize your purchase or rolled into your mortgage.

Many mortgage lenders will work with homebuyers who make smaller down payments. For those who need flexibility with their down payment, Chase Bank offers mortgages with as little as 3% down, which is one reason it made CNBC Select’s list of best mortgage lenders. PNC Bank also offers a variety of loan options, including a special one for medical professionals and a PNC Community Loan option that allows small down payments without private mortgage insurance.

Private mortgage insurance (PMI) is typically used for conventional mortgage loans. You usually pay a monthly cost for PMI, which can range from 0.1% to 2% of your loan balance per year.

There are four common types of private mortgage insurance you might come across:

• Borrower-paid mortgage insurance. The most common type of PMI has you pay an additional monthly fee with your mortgage payments, and you continue paying each month until it’s canceled when you reach 22% equity in your home. In some cases, this insurance is removed with as low as 20% equity.
• Single-premium mortgage insurance. This private mortgage insurance is paid upfront. This leads to lower monthly payments, but it could mean forfeiting that money you paid upfront if you need to move and sell your home, or refinance your home.
• Lender-paid mortgage insurance. Your lender will pay your PMI with lender-paid mortgage insurance. However, these loans generally come with higher interest rates on the mortgage, so you’ll still be on the hook for the costs.
• Split-premium mortgage insurance. Split-premium mortgage insurance has you pay a portion of your PMI costs upfront at closing, with the rest of the cost rolled into monthly payments.

• Wait for your home’s equity to reach 22% for automatic cancellation. PMI must be canceled by the loan servicer when you reach 22% of your home’s equity.
• Request your loan servicer to cancel PMI once your home equity has reached 20%. You’ll typically need to have a good payment history, not be behind on your payments, and not have a second mortgage like a home equity loan or line of credit.
• Get your home reappraised. If home values near you have risen substantially or you’ve made big improvements, you may have more equity in your home than you would otherwise. According to the National Association of Realtors, the typical home appraisal costs between $300 and $400.
• Refinance your mortgage. If you have an FHA loan and want to get rid of MIP (while also having enough equity in your home to avoid PMI), you could lower your monthly payment by refinancing. Just consider the pros and cons of refinancing your home before going with this option, as it could mean paying another set of closing costs, taking on more debt, and lowering your credit score.

FHA loans may require as little as a 3.5% down payment. But MIP is required on all FHA loans, regardless of the down payment size. When you get an FHA loan, you’ll pay an upfront mortgage insurance premium (which can be financed into your premium) and an annual premium payment as part of your mortgage.

Unlike PMI, which can be canceled when you reach a certain amount of equity in your home, MIP requires you to refinance your mortgage to a conventional mortgage before you can stop paying.

If you made a down payment of 10% or more with an FHA loan, you’ll pay MIP for 11 years. Without a 10% down payment, you’ll pay MIP for the life of the loan.