What is Private Mortgage Insurance and When Do You Have to Get It?

What private mortgage insurance is 

Private mortgage insurance is insurance provided by private insurance companies so that your lender can be secured in the event that you default on your payments or don’t meet other obligations. Private mortgage insurance is generally required when you make a down payment of less than 20 percent of your home’s purchase price and have a conventional mortgage. Similarly, if you want to refinance your conventional loan and have less than 20 percent equity in your home, you will need private mortgage insurance.

What are the benefits of private mortgage insurance?

Private mortgage insurance benefits you in the sense that you don’t have to put down a hefty down payment. Also, private mortgage insurance is tax-deductible, meaning you will receive a certain portion of your premium back during your tax returns. Your lender can benefit from your private mortgage insurance in the case that you are unable to pay your monthly payments. 

How much is private mortgage insurance?

The typical cost of private mortgage insurance ranges from 0.55% to 2.25% of the original loan amount. For example, for a home loan of $250,000 you can expect to pay between $1,375 to $5,625 per year for private mortgage insurance. You will typically pay this amount in monthly installments or will be able to pay it upfront during the closing, or a combination of both depending on your lender.

The cost of private mortgage insurance will depend on the following factors:  

• Loan amount
• Credit score and history, a good credit score will give you a lower private mortgage insurance rate
• Type of loan, variable interest rate loans can have higher private mortgage insurance to compensate for the higher potential risk that lenders face

When you can cancel private mortgage insurance

To get rid of private mortgage insurance, you must have at least 20% equity in the home. All you have to do to cancel your mortgage insurance on your conventional loan is to have paid down the mortgage balance to 80% of the home’s value. Your loan lender will notify you of when you will have paid 20% of your balance at the time of closing, so you can be aware of when you no longer need private mortgage insurance. Feel free to reach out to your lender and ask this if you forget or believe your lender didn’t mention it. Lenders won’t actively remind you of when your mortgage insurance is eligible to be canceled so you must be proactive in this matter.

Bottom line

Private mortgage insurance can be canceled if you have taken it for a conventional loan when it reaches a certain percentage. While mortgage insurance may seem like an additional cost, it may be beneficial if you don’t have the funds to put a hefty down payment.