4 min read De-Mystifying PMI If you’ve been comparing mortgage options, you’ve probably run across the acronym ‘PMI’ during your search. PMI stands for Private Mortgage Insurance, which is something you may have to pay if you get a conventional mortgage for 80% or more of your home’s value. A conventional mortgage is one that is made by a private company that isn’t backed by a government guarantee, like an FHA or VA loan. Introducing the Secondary Mortgage Market After you close on your home, your mortgage lender will most likely ‘bundle’ your loan with many other mortgages and sell that package on what’s called the secondary market. Investors buy those mortgage packages, which are called mortgage-backed securities. Eligible mortgages are called ‘conforming’ loans, because they conform to a standard set of investor rules. Most investors follow the guidelines established by FannieMae and FreddieMac, which are the two largest mortgage investors in the U.S. Known as ‘Fannie and Freddie,’ they end up owning or guaranteeing over 70% of the mortgages originated in America.* PMI and Conforming Loans One of the conforming rules is that any mortgage for 80% or more of a home’s value must have Private Mortgage Insurance. ‘Conforming’ conventional mortgages typically have lower closing costs, which is one of the reasons many homebuyers choose them. What is PMI for? PMI is simply an insurance policy that investors require to protect their investment. If you put less than 20% down with a conventional mortgage, you will have to pay PMI, regardless of which lender you work with. Can you get a mortgage without PMI? Yes, you can! If you make a 20% or greater down payment when you buy a home, you won’t have to pay PMI on a conventional mortgage. Also, if you or a co-borrower are on active duty in the military or a veteran, you may qualify for a VA loan that doesn’t require PMI. You may also qualify for a USDA rural housing loan that doesn’t have PMI if you purchase a home in a rural area of the country. FHA loans are another option. They are backed by the Federal Housing Administration. You can get an FHA loan with just 3.5% down, but you will have to pay what’s called an upfront mortgage insurance premium (UFMIP) with this type of loan. Can you get rid of PMI on a conventional mortgage? Yes! There are two ways to do this: First is Automatic PMI Cancellation. If you are current on your monthly payments, your loan servicer will automatically remove PMI once you have at least 22% equity in your home (equity is portion of your home that you own, minus the mortgage balance you still owe.) The second possibility is requesting cancellation. This may require a two-year on-time payment history, but if you’re confident your home’s value has increased since you bought it, you could pay to have your home appraised again. If the portion of the home you own free and clear is 20% or more, you can use that appraisal to request PMI be removed from your monthly payments. Talk to a Mortgage Banker to learn more about requirements for requesting PMI cancellation for your specific mortgage. Talk to a Mortgage Banker PMI makes it possible for homebuyers to get a conventional loan without having to put 20% down, which is a significant amount with today’s real estate prices. Before you buy, it’s a good idea to talk to a mortgage banker about your finances and get some advice on your best options. We hope this run-down on PMI helps you make smart decisions, and we look forward to helping you! *Bankrate.com, Fannie Mae vs. Freddie Mac: What's the difference?
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