Buying your first home can make you feel like you’re learning a new language. Loan-to-value ratio? Adjustable rate mortgage? Origination fees?
Private mortgage insurance (PMI) is another term that leaves many first-time homebuyers scratching their heads. But before you dive into a Google search, we’ve got the lowdown on what PMI is, who has to pay it, and how to decide whether to pay your premium monthly or upfront.
What Is PMI?
PMI is a type of mortgage insurance that protects the lender if you default on your loan. PMI is required when a homebuyer doesn’t have at least 20 percent to put down on a conventional mortgage or when a homeowner wants to refinance but doesn’t have a minimum of 20 percent equity.
Although paying PMI may seem disagreeable because it potentially increases your monthly mortgage payments, it can also help you qualify for a mortgage you otherwise wouldn’t be eligible for.
For example, if you don’t have 20 percent to put down on a new home, paying PMI on a conventional loan will allow you to make a smaller down payment. And if you want to refinance but don’t have 20 percent equity in your home, PMI makes it possible to get approved with less equity.
Understand Your Options for Paying PMI
Although the rules for who has to pay PMI are pretty cut and dried, you have a few different options for how to pay it.
This is the most common method for paying PMI. The premium is calculated based on a percentage of the mortgage balance and added to your monthly payments.
This approach allows you to pay the entire premium upfront at your mortgage closing so no additional cost is added to your monthly bill.
Some lenders will pay your PMI premium in exchange for a higher interest rate.
This method combines the monthly and single premium options, so you pay a portion of the PMI premium upfront and add the rest to your monthly mortgage payments.
If you're having trouble deciding which option is right for you, a mortgage calculator lets you look at each scenario and how it will affect your monthly payment so you can make an informed decision.
Is It Better to Pay PMI Upfront or Monthly?
There is no one-size-fits-all answer to this question. However, there are certain scenarios in which one approach may be more favorable.
Pay PMI upfront if:
- You have the cash to cover the premium cost without leaving yourself cashless.
- Your closing costs are being paid by the seller.
- You have enough money to pay PMI upfront and make home repairs and improvements.
Pay PMI monthly if:
- You don’t have a lot of cash, but you do have high credit scores.
- You need to keep some cash available for repairs and improvements.
- You don’t plan to stay in the home long enough to break even on the upfront payment.
When Can I Stop Paying PMI?
If you choose to pay PMI monthly, you need to understand how long you are responsible for PMI and how to cancel it when you are eligible.
There are three main ways to remove PMI from your mortgage. Each option is contingent on your mortgage payments being up to date.
- Submit a cancellation request to your lender on the date the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home.
- Your lender must automatically cancel PMI on the date your principal balance is scheduled to reach 78 percent of the original value of your home.
- Your lender must cancel PMI the month after you reach the midpoint of your loan’s amortization schedule, even if you haven’t reached 78 percent of the original value.
PMI or No PMI? We Can Answer That!
The BNC Mortgage Lenders team has decades of experience helping homebuyers decipher the mortgage application process. If you have questions about when to pay PMI—or anything else about mortgages—we’re here to help. Contact us or apply now, and one of our knowledgeable mortgage lenders will be in touch.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. No content on the site constitutes financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the laws relating to those matters.
About the Author
BNC National Bank
We’re honored to be your partner in the homebuying process. And like any good relationship, it helps to know who you’re working with. A home is the most important purchase we can make in a lifetime. At BNC, we’re built to deliver exceptional customer service from your first call to your closing day and beyond. BNC National Bank has helped families find the right loan to fit their needs for decades.