Content of the material
- What is PMI, or private mortgage insurance?
- How Much Does PMI Cost?
- 8. How is my mortgage rate decided?
- Other low down payment mortgage options available
- The HomeReady Mortgage
- Conventional 97 Mortgage
- USDA Loans
- VA Loans
- FHA Loan Mortgage Insurance Requirements
- Lender Paid Mortgage Insurance
- Get a VA loan
- 1. What is pre-approval and how does it work?
- Ready to Get Started?
- Conventional PMI versus FHA MIP
- How To Get Rid Of PMI
- Borrower-Paid Mortgage Insurance
- Lender-Paid Mortgage Insurance And Mortgage Insurance Premiums
- What Is a Second Mortgage?
- Take Advantage of Low Rates With Just 3% Down
- Alternatives to PMI
- Mortgage insurance FAQ
- The Bottom Line
What is PMI, or private mortgage insurance?
PMI is a type of mortgage insurance that protects the lender in case you default on your mortgage.
Homebuyers who use a conventional mortgage with a down payment of less than 20 percent usually are required to get private mortgage insurance. This is an added annual cost — about 0.3 percent to 1.5 percent of your mortgage balance, although it can vary.
According to Freddie Mac, each month, borrowers generally might pay between $30 and $70 in PMI for every $100,000 of loan principal. How much you pay depends on your credit score, your mortgage and loan term, and the amount of your down payment. Your PMI is recalculated each year based on the current size of your loan balance, so the premium will decrease as you pay down the loan.
“Private mortgage insurance protects the lender from the elevated risk presented by a borrower that made a small down payment,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “Once the borrower has a sufficient equity cushion, the PMI will be removed.”
PMI doesn’t apply to all mortgages with down payments below 20 percent. For example, government-backed FHA loans and VA loans with low or zero down payment requirements have different rules. Private lenders sometimes offer conventional loans with small down payments that don’t require PMI; however, there are typically other costs, such as a higher interest rate, to compensate for the higher risk.
How Much Does PMI Cost?
The annual cost of PMI varies depending on the amount you borrow, the size of your down payment, your credit score and the insurance company you use. In general, annual costs may run anywhere from 0.3% to 1.5% of the original loan amount. For example, if you take out a $200,000 mortgage, you could pay between $600 and $3,000 a year. A good rule of thumb is the smaller your down payment (and sometimes, the lower your credit score), the higher the premium you’ll pay.
8. How is my mortgage rate decided?
Mortgage rates change almost daily and can depend on market forces such as inflation and the overall economy. While the Federal Reserve doesn't set mortgage rates, they tend to move in reaction to actions taken by the Federal Reserve on its interest rates.
While market forces may influence the general range of mortgage rates, your specific mortgage rate will depend on your location, credit report and credit score. The higher your credit score, the more likely you are to be qualified for a lower mortgage interest rate.
Other low down payment mortgage options available
Bank of America isn’t the only lender offering 3 percent downpayment loans. Large and small mortgage lenders and banks across the country offer low downpayment loans that are not specific to a single lender.
The HomeReady Mortgage
HomeReady is a Fannie Mae program that allows 3% down and a credit score of just 620. Guidelines limit the amount the eligible applicant can make in some areas of the country. In areas considered underserved, there is no income limit.
This loan is considered the first multi-generational loan, since buyers can use the income of non-borrowing household members to help them qualify. Adult children can qualify more easily when buying a bigger home they plan to live in with their elderly parents.Click here to check your HomeReady eligibility.
Conventional 97 Mortgage
The Conventional 97 loan also requires just 3% down with a low credit score of 620. Borrowers will have to pay PMI, but on a 30-year fixed-rate mortgage these payments will go away after 10 years.
Quicken Loans has their own 3% down mortgage program called the Home Possible mortgage. While it does require PMI, borrowers can have a higher annual income with Home Possible than with Bank of America’s loan.
If borrowers are looking for low down payments, a USDA loan should not be overlooked. USDA loans require 0% down payment and the minimum required credit score is 640. Also, they do not require PMI, but rather an annual fee that is usually much lower than most mortgage insurance.
USDA loans are only available in areas that are less dense in terms of population, but many suburban areas are eligible. Borrowers may also make up to 115 percent of their area’s median income, making these loans less exclusive than most low-to-no down payment mortgages.
For home buyers with qualifying military service, a VA-backed mortgage loan is an attractive option. These loans are available with no down payment and lower interest rates. Borrowers won’t have to pay mortgage insurance either though there is a one-time funding fee that allows the program to be self-sustaining and is significantly less than monthly mortgage insurance premiums.
FHA Loan Mortgage Insurance Requirements
LPMI and BPMI only apply to conventional mortgages. What about FHA loans? An FHA loan is a government-backed mortgage that’s insured by the Federal Housing Administration. You pay a mortgage insurance premium (MIP) instead of PMI for an FHA loan. MIP is similar to private mortgage insurance, and gives your lender the same protections if you default on your loan. However, you must pay for MIP at closing and each month. You must also pay MIP for the life of your loan if you have less than 10% down. If you put 10% down, you pay MIP for 11 years.
Lender Paid Mortgage Insurance
Some lenders will pick up the cost of PMI. Instead of PMI, the lender charges a higher interest rate than a buyer putting 20% down. Depending on the lender paid PMI option, the payment could be lower than with buyer paid PMI and the larger amount of interest paid is tax-deductible.
Get a VA loan
If you qualify for a VA loan, most financial experts would tell you to go in that direction. The VA loan offers a number of benefits like zero down payment and a VA loan doesn’t charge PMI because the government agency is guaranteeing the loan itself.
1. What is pre-approval and how does it work?
Pre-approval is a statement or letter from a lender that details how much money you can borrow to purchase a home and what your interest rate might be. To get pre-approved, you may have to provide bank statements, pay stubs, tax forms and employment verification, among other documents. Once you're pre-approved, you'll receive a mortgage pre-approval letter, which you can use to begin viewing homes and making offers. It's best to get pre-approved at the start of your home-buying journey before you start looking at homes.
Ready to Get Started?
Whether you’ve found the home of your dreams or you’re still exploring the possibilities, Navy Federal has multiple mortgage options that don’t require PMI. Find the one that works best for you.
Conventional PMI versus FHA MIP
It is important to note the difference between PMI (private mortgage insurance) and MIP (mortgage insurance premium).
- PMI (private mortgage insurance) is applied to conventional loans. It can be canceled at 80% loan-to-value ratio (LTV), or removed automatically at 78% LTV
- MIP (mortgage insurance premium) is applied to loans insured by the Federal Housing Administration (FHA loans). It cannot be canceled, and it will not be removed automatically — unless the homeowner bought with more than 10% down and paid MIP for a full 11 years
Because of the FHA’s mortgage insurance rules, many borrowers prefer conventional PMI. It will eventually fall off on its own, whereas most borrowers with FHA MIP are stuck paying it until they refinance or pay off their loan.
The same is true for USDA loans which require their own type of mortgage insurance called a guarantee fee.
How To Get Rid Of PMI
You can remove PMI from your monthly payment after your home reaches 20% in equity, either by requesting its cancellation or refinancing the loan. The specific steps you’ll take to cancel your PMI will vary depending on the type of insurance you have.
Borrower-Paid Mortgage Insurance
Step 1: Build 20% equity. You cannot cancel your PMI until you have at least 20% equity in your property. Continue to make payments on your loan each month. Divert any extra money you have coming in toward your principal to build equity faster. Don’t forget to include a note with your extra payments that tells your lender you want the payment to go toward your principal balance and not your next payment. Sometimes there’s a spot on your statement or a checkbox online for this.
Step 2: Contact your lender. As soon as you have 20% equity in your home, let your lender know to cancel your PMI. Follow any necessary steps your lender requires to make this happen.
Step 3: Make sure your PMI is gone. Ask your lender to confirm that you no longer have to pay PMI. Then, request a mortgage statement with your current payment information. Make sure that your monthly payment is lower than what you were paying when you had PMI on your loan. Request more information from your lender if you see that your monthly payment stays the same.
Lender-Paid Mortgage Insurance And Mortgage Insurance Premiums
You can only remove your payments through a refinance if you have LPMI or you have MIP and made less than a 10% down payment (though, some borrowers may qualify for FHA MIP removal if their loan started before June 3, 2013).
Step 1: Reach 20% home equity. You must reach 20% equity in your home before you’ll be allowed to refinance. You’ll need to pay for PMI again if you refinance with less than 20% equity.
Step 2: Compare lenders. You don’t have to refinance with your current lender – you may work with a new company if you’d like. Compare lenders in your area and choose one you’d like to use for a refinance. Check their refinancing standards to make sure you qualify before you apply.
Step 3: Apply for a refinance. Fill out an application, submit your financial documentation and respond to any inquiries from the lender as soon as possible. Remember to specify that you want to refinance to a conventional loan.
Step 4: Wait for underwriting and appraisals to clear. Once you apply for your loan, your lender will begin a process called underwriting. During this time, a financial expert takes a look at your documents and makes sure you qualify for a refinance. Your lender will also help you schedule an appraisal. Wait for the appraisal and underwriting processes to be completed.
Step 5: Acknowledge your Closing Disclosure. After underwriting and an appraisal, your lender will send you a document called a Closing Disclosure. This document tells you the terms of your new loan as well as what you must pay in closing costs. Remember to acknowledge it as soon as you receive it. Your lender cannot schedule your closing until you have time to read your disclosure.
Step 6: Attend closing. Here you’ll pay your closing costs and sign on your new loan. From there, you make payments to your new lender.
What Is a Second Mortgage?
A second mortgage is simply additional lien on your home, which you are responsible for paying off according to your loan terms. It is possible to take out a second mortgage to avoid paying PMI on your first mortgage.
Take Advantage of Low Rates With Just 3% Down
Low- to no-downpayment loans are popular among home buyers. Mortgage rates are incredibly low, and rental payments are expected to increase significantly in the future.
However, new homebuyers are finding it difficult to come up with 20% of the home value upfront. Fortunately, borrowers don’t need to put 20% down. In some cases, they will only need to put 3 percent down, and potentially, home buyers may not need to make a downpayment at all.
With today’s low mortgage rates, lenders are rolling out programs that make it easier for a home buyer to get accepted for a low downpayment loan. The new 3% down loan is just one of many low downpayment loans available to those looking to get a mortgage.
Alternatives to PMI
Borrowers with low down payment also often ask: are there alternatives to PMI?
The important distinction of this question versus the “How do I avoid PMI?” question is that alternatives often have the same cost, but they are just marketed differently.
An example that illustrates this point is a jumbo loan above $417,000.
Some jumbos allow for less than 20 percent down with no mortgage insurance. This will be marketed as a way to avoid mortgage insurance. However, from a fee standpoint, you’re not necessarily saving money because you’ll pay a higher rate on this loan — just like you would with Lender Paid PMI on a conforming loan.
So technically, it’s an alternative to mortgage insurance, but you’re not avoiding the fees. This is clear in the marketing of a conforming loan with Lender Paid PMI, but it’s less clear when you’re getting a jumbo loan with less than 20 percent down, because these loans are usually marketed with phrases like “no mortgage insurance.”
Mortgage insurance FAQHow can I avoid PMI without 20 percent down?
You can avoid PMI without 20 percent down if you opt for lender-paid PMI. However, you’ll end up with a higher mortgage rate for the life of the loan. That’s why some borrowers prefer the piggyback method: Using a second mortgage loan to finance part of the 20 percent down payment needed to avoid PMI. Veterans can avoid PMI with no down payment thanks to the VA loan program.How can I avoid PMI with 10 percent down?
If you can make a 10 percent down payment, you could avoid PMI if you use a second loan to finance another 10 percent of the home’s purchase price. Combining these will satisfy your first mortgage lender’s 20 percent down payment requirement, avoiding PMI. This strategy is called an 80/10/10 piggyback loan.Is avoiding PMI worth it?
PMI is a great tool for first-time home buyers. It allows you to make an ultra-low down payment and get into a home much sooner. So, for many home buyers, PMI is a good investment, especially if it means buying a home sooner instead of waiting years to save up 20 percent down.How can I avoid PMI with 5 percent down?
Some borrowers can find special loan programs offering low-down-payment mortgages with no PMI. Most of these programs have income limits or other special qualifying conditions. Even if you can’t find a program that eliminates PMI, you may qualify for Freddie Mac’s Home Possible or Fannie Mae’s HomeReady loan, which allow you to buy with 3 percent down and reduced PMI payments.What credit score will avoid PMI?
A higher credit score should lower your PMI premiums. But a high credit score by itself won’t eliminate PMI requirements. Instead, it’s your down payment size that lets you avoid PMI. Putting 20 percent down eliminates the need for PMI altogether.Will banks waive PMI?
Many lenders will waive PMI in exchange for a higher mortgage rate. However, if you keep the loan long enough, the higher rate will cost more than PMI would have cost. You can avoid PMI without bumping up your mortgage rate if you put 20 percent down or opt for a piggyback loan.Does PMI ever go away?
Yes, PMI will fall off your loan once you’ve paid it down to 78 percent of your home’s value. You can cancel PMI even sooner — when you’ve paid it down to 80 percent LTV — by contacting your loan servicer.Who pays for PMI?
Borrowers pay for PMI, usually along with their monthly mortgage payments. Unlike homeowners insurance, PMI protects the lender and not the homeowner. A PMI policy would help the lender recover its losses if the borrower stopped making monthly payments on the loan.Is PMI tax deductible?
For the 2021 tax year, taxpayers who earned less than $109,000 could deduct at least part of their PMI costs — but only if they itemize deductions instead of claiming the standard deduction. You’d need to work with a tax advisor to find out for sure whether you’d benefit from claiming this deduction.Do jumbo loans have PMI?
Jumbo loans don’t always require PMI. These loans exceed the loan limit set by Fannie Mae and Freddie Mac. Since they don’t conform to the national guidelines, lenders have more leeway with Jumbo loans. But even if they don’t require PMI, a lender may require a 20 percent or larger down payment just to get approved. Or, lenders may want an applicant to show several years’ worth of monthly payments saved in a bank account.Is PMI tax deductible?
For the 2021 tax year, taxpayers who earned less than $109,000 could deduct at least part of their PMI costs — but only if they itemize deductions instead of claiming the standard deduction. You’d need to work with a tax advisor to find out for sure whether you’d benefit from claiming this deduction.
Do jumbo loans have PMI? Jumbo loans don’t always require PMI. These loans exceed the loan limit set by Fannie Mae and Freddie Mac. Since they don’t conform to the national guidelines, lenders have more leeway with Jumbo loans. But even if they don’t require PMI, a lender may require a 20 percent or larger down payment just to get approved. Or, lenders may want an applicant to show several years’ worth of monthly payments saved in a bank account.
The Bottom Line
If you are a borrower who has less than a 20% down payment, the decision of whether to use a first stand-alone mortgage and PMI or opt for a combination of a first and a second mortgage is largely a function of how quickly you expect the value of your home to increase.
- If you choose to pay PMI, an appraisal can eliminate it once the LTV reaches 78%.
- If you choose to use a combination of first and second mortgages, you will likely have initial payment savings. However, the only way to eliminate the second mortgage, which will likely carry a higher interest rate than the first, is by paying it off or refinancing your first and second loans into a new stand-alone mortgage.
If you can't come up with a higher down payment or a less expensive home, calculate your options based on your time horizon and how you expect the real estate market to develop. Of course, nothing is entirely predictable, but this will give you the best chance of making the most favorable decision.