Understanding Private Mortgage Insurance – How Does It Work?

PMI, an abbreviation for private mortgage insurance, is an insurance premium charged by mortgage lenders and paid for by the mortgage borrower.

Do I have to pay PMI?

PMI is generally required on conventional home loans with an LTV (loan-to-value) ratio of more than 80 percent. In other words, if you make a down payment of less than 20 percent, you will most likely need to pay PMI.

There are some exceptions. Government-backed loans such as FHA, VA, and USDA loans may not necessarily have PMI, but they may have a different type of insurance fee that is required.

FHA loans require a low down payment of only 3.5 percent; however, the borrower must pay a one-time mortgage insurance premium upfront, as well as an annual mortgage premium. The upfront premium can be financed into the loan and the annual premium is paid monthly.

USDA loans may not have PMI either, but they may require a one-time upfront fee that is similar to, but often less than a typical PMI premium.

VA loan borrowers do not have to pay PMI, but they will usually have to pay a funding fee that helps support the program. Some VA borrowers are exempt from paying the fee, such as those who receive VA compensation for a service-related disability. You can learn more about VA loan fees on the U.S. Department of Veterans Affairs website.

How Much are PMI fees?

For conventional loans, PMI costs can vary; however, the cost is usually between 0.5% to 1% of the entire loan amount on an annual basis. For example, if you have a loan of $100,000 and a PMI premium of 1%, your annual premium would be $1,000 per year, or $83.33 per month.

For USDA loans, the one-time premium is 2% of the loan amount, and can be financed into loan. So, with a 100,000 loan, your premium would be $2,000. If you financed this fee into the loan, your mortgage would total $102,000.

For FHA loans, the one-time upfront premium may cost 1.75% of the loan (subject to change). This upfront premium may be financed into the loan. The annual premium rates will vary based on the length of the loan, the amount borrowed, and the initial LTV (see below).

• 15 year loan, equity less than 10% – 0.7%
• 15 year loan, equity 10% or more – 0.45%
• 30 year loan, equity less than 5% – 0.85%
• 30 year loan, equity 5% or more – 0.8%

Using the same example, a 30 year FHA loan of $100,000 with the minimum 3.5% down payment could require an upfront premium of $1,750 and an annual premium of $850 ($70.83 per month).

For VA loans, the cost of the one-time funding fee varies based on the borrower’s service, whether it is their first time using the loan, and their down payment amount. It can also vary based on the type of home they are financing (manufactured homes may have different fees), and whether they are using their VA entitlement for a purchase loan or a refinance loan.

Because the VA funding fee costs can vary by so many factors, it’s best to check the latest VA funding fee chart online or talk to one of our loan experts at Luxury Mortgage.

Do I Have To Pay PMI Forever?

With conventional loans, you can request that your PMI premium be cancelled once your loan balance drops to 80 percent of the original value. Once your loan balance drops below 78 percent of the original value, your lender is required to drop the PMI.

With FHA loans, the annual premium may be discontinued under very special circumstances.

With VA and USDA loans, the fees are only paid once, and can be financed into the loan. This makes them excellent choices for borrowers who want to avoid paying PMI but do not have enough cash for a 20% down payment.

Disclaimer: While we do our best to provide accurate information on private mortgage insurance and other loan fees, please note that this information is subject to change. Talk to one of our loan professionals for the most accurate and up-to-date information.