If youâre getting a mortgage, youâre likely aware that there can be a ton of acronyms used throughout the process. One of the most confusing conversations involves explaining PMI vs. MIP. Private mortgage insurance (PMI) applies to conventional loans with less than 20% down payments, while mortgage insurance premiums (MIP) are associated with FHA loans.
Buying a home is an exciting milestone, but it also involves navigating a complex mortgage process. One common requirement that catches many first-time homebuyers off guard is private mortgage insurance (PMI). If your down payment is less than 20% of the purchase price, your lender will likely require PMI on a conventional loan. This extra monthly payment protects the lender if you fail to make your mortgage payments.
While PMI provides security for your lender, it drains your budget without adding any value to your home Fortunately, savvy homebuyers can opt out of PMI with the right lender and loan program As a respected national mortgage lender, Quicken Loans offers creative solutions to skip PMI and its burdensome costs.
Read on to learn how PMI works, who needs it, and how you can avoid it with Quicken Loans
What Is Private Mortgage Insurance?
Before diving into PMI avoidance tactics let’s make sure you understand what PMI is and how it works. PMI is an insurance policy that covers your mortgage lender in case you stop making payments on your home loan. It protects the lender if they need to foreclose on the property.
Conventional mortgages almost always require PMI if your down payment is less than 20% of the purchase price. For example, if you buy a $200,000 home with 10% down ($20,000), your lender will ask you to pay for PMI. That’s because you only have 10% equity in the home. The remaining 90% of the value is financed. Your lender sees this as a risk and wants insurance to cover potential losses.
On the other hand, if you put 20% down, your equity would match the lender’s financed amount. With equal risk sharing, the lender doesn’t require mortgage insurance.
While PMI shields lenders, it doesn’t benefit you as the borrower at all. Yet you’re the one footing the bill each month. The typical PMI payment ranges from 0.5% to 1% of the loan amount annually. On a $180,000 loan, you would pay $900 to $1,800 per year.
Over a 30-year loan term, a 1% PMI rate totals $54,000 in extra mortgage payments. As you can see, PMI can seriously inflate homeownership costs.
Who Needs PMI?
Most conventional mortgages require PMI when your down payment is less than 20% of the purchase price. However, certain borrowers can avoid PMI through specific programs:
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VA loans: The Department of Veterans Affairs backs loans for eligible service members, veterans, reservists, and some surviving spouses. VA loans don’t require any down payment or monthly mortgage insurance.
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USDA loans: Very low and low-income borrowers in rural areas may qualify for a USDA home loan. This program requires no down payment and no PMI.
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Piggyback loans: Borrowers with strong credit can qualify for a piggyback mortgage to avoid PMI. You get both a first and second mortgage concurrently to reach 80% loan-to-value.
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Single-premium MI: Some lenders let you pay for MI upfront in a lump sum at closing. This avoids monthly payments.
If you don’t fit into one of these exceptions, expect to budget for PMI with a conventional loan and down payment under 20%.
How To Avoid PMI with Quicken Loans
As a large national lender, Quicken Loans offers homebuyers options to minimize or eliminate costly PMI:
1. 97% LTV Conventional Loans
Many first-time buyers assume they need at least 5% down to buy a home. However, Quicken Loans offers 97% loan-to-value mortgages on conventional loans. You can get approved with just 3% down while avoiding PMI. This program gives you an edge when saving for a down payment.
Qualifying for a 97% LTV loan depends on your income, existing debts, and credit score. But it provides more options if you don’t have 20% down. The catch is that this type of loan may come with a slightly higher interest rate than a loan with 20% down. However, the rate savings from skipping PMI can balance this out.
2. Mortgage Insurance Discounts
If you can’t get a 97% LTV loan and need to pay PMI, Quicken Loans may help minimize those costs. Based on your credit score and financial profile, you may qualify for discounts on PMI compared to the average buyer. Even shaving 0.125% off your PMI rate saves nearly $50 per month on a $200,000 mortgage.
Ask your loan officer if any discounts or rebates can help reduce PMI expenses if you’re paying monthly. Lowering your rate even a little bit goes a long way.
3. Pay PMI Upfront
Most borrowers pay PMI monthly over their loan term. But Quicken Loans also gives the option to prepay PMI at closing. Rather than private mortgage insurance dragging down your payment each month, you pay it once upfront.
Depending on the size of your mortgage, paying PMI at closing typically costs between $2,000 and $4,000. While that’s not pocket change, it eliminates years of interest charges you would pay on monthly PMI.
If you have extra savings to cover PMI upfront, this strategy saves big over the long run. Crunch the numbers with a mortgage calculator to see if prepaying works for your budget.
4. Pay PMI Off Early
Made extra money this year from a tax refund, bonus, or side gig? Consider putting that cash toward eliminating your PMI faster.
Most lenders let you remove PMI once you build 20% home equity through mortgage principal payments. However, this usually takes several years. When you send extra payments toward your mortgage balance, you accelerate equity and can ditch PMI sooner.
Run the numbers to see if an extra $100 or $200 monthly makes sense for your goals. Building equity faster lessens the blow of budget-draining PMI.
5. Refinance Without PMI
If all else fails, you always have the option to refinance your mortgage once you hit 20% equity. When you refinance, you take out a new home loan and use it to pay off your existing one. Lenders can’t require PMI on refinances with 20% equity or higher.
Monitor your home value and loan balance annually. As soon as you cross the 20% threshold, look into a no-PMI refinance. Slashing PMI from your payments through refinancing typically leads to significant monthly savings.
PMI Doesn’t Have To Drain Your Budget
Buying a home with less than 20% down leads many borrowers to accept PMI as an inevitable extra cost. However, with the right lender, you can minimize the burden through discounted rates, upfront payments, early payoff, or quick refinancing. This saves you money for more important things like home repairs and improvements.
As one of America’s top mortgage lenders, Quicken Loans offers the options busy homebuyers need. Their team looks for ways to reduce PMI expenses through customizable loans. If you want the highest bang for your buck when buying a home, look no further. Reach out to a Quicken Loans specialist to start your PMI-free mortgage process today.
What Is Mortgage Insurance?
Mortgage insurance helps protect a lenderâs investment when a borrower defaults on a loan. Mortgage insurance allows lenders to offer loans with smaller down payments to lower a common barrier to homeownership or approve refinancing with lower amounts of equity. Certain loans with more flexible credit requirements also have a mortgage insurance requirement.
MIP And PMI Annual Costs
The FHA sets MIP rates based on the size of your loan and your loanâs LTV. As of 2023, for a borrower with a 30-year FHA mortgage:
- If your LTV is 90% or lower: Your annual MIP will be 0.5% of the total loan amount for 11 years.
- If your LTV is 90% â 95%: Your annual MIP will be 0.5% for the life of the loan.
- If your LTV is greater than 95%: Your annual MIP will be 0.55% for the life of the loan.
For example, if you take out an FHA loan for $300,000 and make a 3.5% down payment, youâll pay $1,650 a year or $137.50 a month for the life of the loan.
Lenders set PMI rates according to the size of a loan and a borrowerâs creditworthiness. Typically, PMI costs are in the 1% â 2% range of your total loan amount.
If you take out a $300,000 conventional loan and your PMI is 1.5%, your annual PMI would be $4,500, and your monthly mortgage insurance payment would be $375.
You can ask your lender to stop charging PMI when your LTV reaches 80%, but itâs automatically canceled once your LTV hits 78%. However, the equity threshold to cancel LTV may be higher for a multifamily or investment property.
Most FHA borrowers pay FHA mortgage insurance for the entire loan term. The exception is when itâs canceled after 11 years because the borrower made at least a 10% down payment.
Itâs important to note that the life of the loan doesnât mean the life of the home. One way FHA borrowers with permanent MIP remove it is to refinance into a conventional loan after theyâve reached the 20% equity threshold to avoid paying PMI when they refinance.
Quicken Loans Review: Is Rocket Mortgage Really That Easy?
What does PMI mean on a mortgage?
Private insurers provide private mortgage insurance (PMI) to mortgage lenders on conventional loans. Borrowers pay PMI in exchange for making a lower down payment. The insurance is required when the down payment or equity amount is less than 20%, and it compensates the lender if a borrower defaults on a loan. How Do You Pay PMI?
Does Quicken offer a mortgage?
Its parent company is Rock Holdings, Inc. Quicken provides only mortgages and loans – it doesn’t offer any banking, investment or other financial products. It does, however, offer a range of mortgage products, including fixed-rate mortgages, adjustable-rate mortgages, FHA loans, VA loans and jumbo loans.
What types of PMI can come with a mortgage?
The terms and cost of PMI depend on its type. Here are the kinds of PMI that can come with a mortgage: Borrower-Paid Mortgage Insurance: Borrower-paid mortgage insurance (BPMI) means the mortgage borrower pays the lender PMI premiums. These premiums go away when the borrower reaches 20% equity in the home.
What is PMI insurance & how does it work?
PMI is a type of insurance some conventional loan borrowers must pay. If you have PMI, you pay it as part of your monthly mortgage payment. It offers the owners of your mortgage some protection in the event of a default or foreclosure. Mortgage lenders may require PMI payments if your down payment on your house is less than 20%.