The general practice among lenders is to require MI with down payments of less than 20%, with an insurance rate of 1.0% to 6% of the initial loan amount depending on these factors:
- credit score
- fixed or variable
- loan-to-value (LTV)
- percent of the loan insured
Payments can be annually, monthly or split (a combination of both). The borrower should check with a CPA to determine if this premium is tax-deductible because tax laws can change.
"Traditional Mortgage Insurance" or Borrower-Paid Private Mortgage Insurance (BPMI)
Mortgage insurance products that are paid for by the borrower to private insurance companies to cover the added risk to the lender of loans with down payments below 20% are called Borrower-Paid Private Mortgage Insurance (BPMI). This insurance can assist buyers with insufficient funds for a full down payment, and obtain a home sooner.
When a loan balance reaches 78% of the purchase price of the property, the Homeowners Protection Act of 1998 mandates that PMI be cancelled. If a new appraisal shows that through appreciation in property value that the loan balance is 80% of the appraised value and payments have been on-time for two years, the BPMI may be cancelled sooner.
Is private MI needed?
Mortgages with low down payments are riskier for lenders and investors. Homeowners with less than 20% invested in the value of a home in theory, are more likely to default on their loan obligation. Investors and lenders offset that risk by typically requiring mortgages with less than a 20% down payment to have mortgage insurance.
How does private MI benefit borrowers?
- Private MI helps families become homeowners sooner and obtain a loan with a lower down payment.
- Private MI helps first-time buyers get a loan with less than 20% down payment, the biggest stumbling block to first-time home ownership.
- Private MI allows trade-up buyers a wider range of home choices and to leverage their investment in their property.
- making other investments
- building an emergency fund
- paying down debt
- completing home improvements