-
Personal Banking -
Insights
What Is Mortgage Insurance & Do You Need It?
Private mortgage insurance (PMI) can be confusing for many homebuyers. It’s different from homeowner’s insurance and may be required by the mortgage lender.
Before getting a mortgage loan, it’s a good idea to understand what PMI is, whether you will need it and how you can stop paying for it.
Keep in mind that lender requirements can vary, and this article is meant as a general guide — your specific costs and options will depend on your loan program and lender.
What Is Private Mortgage Insurance?
PMI is intended to protect the lender if the borrower stops making payments. While your mortgage lender may require you to pay PMI, those insurance payments are to reduce your lender’s risk in case you default on the loan, and they may help you to qualify for the loan.
Typically, PMI is required for conventional mortgage loans when the down payment is less than 20%. Rather than making you wait to buy a home until you’ve saved up at least 20% as a down payment, PMI allows you to go ahead and get into a home with a smaller down payment that’s accompanied by an extra insurance payment on a monthly loan amount.
Some lenders have varying requirements when it comes to PMI and some might waive PMI requirements for down payments smaller than 20%.
Do I Need Mortgage Insurance?
Whether you will need PMI depends on the type of loan you get as well as your down payment amount.
If you qualify for a VA loan or USDA loan, you may be able to skip PMI entirely — these government-backed programs generally don't require it but may charge other fees to guard against a borrower's default. More on that below.
| Type of Loan | Do I need PMI? |
| Conventional loan with down payment less than 20% | Yes, unless the lender has special terms |
| Conventional loan with down payment of 20% or more | No |
| FHA loan | No, but government-backed mortgage insurance (MIP) may be required for the life of the loan |
| VA loan | No, but an upfront funding fee is charged to protect against default. |
| USDA loan | No, but upfront and annual guarantee fees are charged. |
PMI vs. MIP: What’s the Difference?
PMI is known as “private” mortgage insurance, and it is not the same as a government-backed mortgage insurance premium (MIP).
PMI is required for conventional loans with down payments lower than 20%. After sufficient equity of at least 20% of the home’s value is built, PMI can be removed from your mortgage, resulting in a slightly lower payment.
MIP is like PMI but is backed by the government and is required for an FHA loan. In most cases, MIP is required for the life of the loan depending on down payment and term and will not be removed as equity is built.
How Much Does Mortgage Insurance Cost?
The price of PMI is typically 0.5% to 1.5% of the loan amount per year. That translates to about $30 to $70 per month for every $100,000 borrowed. For example, if you borrow $400,000, you might pay $120 per month in PMI until you reach 20% equity in your home.
While these figures are typical, the cost of PMI is influenced by multiple factors including your credit score, loan size, down payment amount and loan type.
Is PMI Tax-Deductible?
PMI deductibility has changed over the years and depends on current tax law. As of recent tax years, the mortgage insurance premium deduction has been subject to income phaseouts and legislative renewal, so it may or may not apply to your situation. Talk to a tax professional before assuming PMI is deductible on your return.
Types of PMI
The most common type of PMI is borrower paid. Borrower-paid PMI is added to your monthly payment and can be cancelled when the equity benchmark is reached.
Lender-paid PMI (LPMI) is rolled into a higher interest rate. LPMI cannot be cancelled without refinancing.
Finally, single-premium PMI is paid upfront at closing.
How Do I Get Rid of PMI?
After you’ve made enough mortgage payments to reach equity of at least 20% of the original appraised value or purchase price, whichever is lower, or the appraised value at the time of refinancing, you may request it to be removed from your loan payments. When your loan-to-value (LTV) ratio reaches 80%, you should request cancellation of PMI. Your lender will cancel PMI only if you are current on your payments.
While you can ask for the removal of PMI with an LTV ratio of greater than 80%, your lender may be unlikely to grant your request.
Under the Homeowners Protection Act, lenders must automatically cancel at 78% LTV ratio.
Depending on your down payment amount and the value of your home, it may take several years to reach 20% equity. If you want to stop paying PMI sooner, you can build equity in your home faster through additional principal payments. Also, if your home value has risen significantly, request a new appraisal and ask your lender to cancel PMI.
You can also consider refinancing to remove PMI. Refinancing will cancel PMI as long as you have at least 20% equity in your home at the newly appraised value.
Can I Avoid PMI Altogether?
You can avoid PMI by making a down payment of 20% of the price of the home or more. If you don’t have a 20% down payment, there are other down payment options.
For example, a piggyback loan is a mortgage with an 80/10/10 structure. That means you take out two loans, one for 80% of the value of the home and another for 10% of the value of the home and bring a down payment of 10%.
Because the first mortgage is just 80% of the price of the home, you avoid paying PMI. The secondary loan, which could be a home equity loan or a home equity line of credit (HELOC) that “piggybacks” on the first loan, provides the second half of your down payment.
You can also avoid PMI by choosing a loan type that doesn’t require it, such as a VA loan or USDA loan. Keep in mind you must qualify for those government-backed mortgage loans, but if you meet the requirements, you can avoid PMI, although you may need to pay other fees that function like MI.
How Long Do You Pay PMI?
For most borrowers with conventional loans, PMI goes away once you reach 20% equity in your home — either by paying down the principal, appreciation in home value, or both. Under the Homeowners Protection Act, your lender must remove PMI automatically when your loan balance reaches 78% of the original purchase price. In practice, many borrowers pay PMI for anywhere from two to seven years before hitting that threshold, depending on their down payment and how quickly they pay down their loan's principal balance.
Learn more about your options by contacting an RBC U.S. Mortgage loan officer at City National Bank today.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory, or legal advice, and any information provided should not be construed as such. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. Any strategies discussed in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies or information presented taking into account your own particular circumstances. Trust services are offered through City National Bank.
Loans and lines of credit are subject to credit and property approval. Additional terms and conditions apply. Not all applicants will qualify. Home equity lines of credit are not available in Texas.
Top