Mortgage loan insurance (PMI), also referred to as private mortgage insurance (PMI), helps borrowers secure home loans with down payments that are too low for conventional or government-backed mortgages. It makes homeownership more accessible for people who would otherwise need years to save up for the 20% down payment required by most lenders or risk missing out on current favorable mortgage rates.
PMI insurance protects lenders in case borrowers default on their mortgage and the homes they own aren’t worth enough to cover the debt. While it’s an additional cost that borrowers must pay, it can be cancelled in several ways.
The most common way to cancel PMI is by making a 20% down payment on your house and reaching a certain level of equity. This amount, often referred to as the “22% rule,” requires lenders nationwide to automatically terminate PMI coverage once reached.
You can request your lender to pay a lump-sum premium at closing, which could reduce out-of-pocket expenses. However, in exchange for this service, you’ll have to accept a higher interest rate.
Furthermore, if you opt for lender-paid mortgage insurance (LPMI), it must be paid throughout the life of your loan – meaning you won’t have the same freedom to cancel it as with BPMI.
Another option is to utilize a seller concession to cover PMI premiums at closing, which could be achieved with a gift from your spouse. Alternatively, you could refinance to a lower interest rate and have your lender cover any LPMI costs from the new loan.
There are other ways to reduce your mortgage insurance premiums as well. One option is purchasing a Home Equity Line of Credit (HELOC). This enables you to borrow the maximum amount necessary for your down payment, which in turn lowers the premiums paid on your mortgage insurance policy.
Other ways to avoid mortgage insurance are saving up for a down payment and purchasing a home with more than 20% equity, or refinancing your loan when interest rates are low. Furthermore, some lenders will offer lower-interest mortgages to borrowers with good credit scores who cannot access conventional financing.
Those with less than 20% equity can take advantage of FHA-backed mortgages, which often feature lower interest rates. However, bear in mind that these mortgages usually require the buyer to pay a down-payment insurance premium.
Title insurance is another option that can protect your property against claims from previous owners, such as tax liens or judgments. Unfortunately, this coverage isn’t usually required by lenders and remains an optional product available to purchase.
Mortgage insurance comes with both advantages and drawbacks, but the primary benefit is that it allows borrowers to buy homes they otherwise wouldn’t be able to afford without this extra financial cushion. Furthermore, having more security allows borrowers to obtain larger mortgages at better interest rates – something especially helpful during difficult economic periods.
