How Much Is Private Mortgage Insurance in California?

Private Mortgage Insurance (PMI) is a common aspect of homeownership, particularly when purchasing a home with a smaller down payment. Lenders typically require this insurance when a homebuyer makes a down payment of less than 20% of the home’s purchase price. PMI protects the lender from financial loss if a borrower defaults on their mortgage payments. While adding to the monthly housing cost, PMI enables many people to achieve homeownership sooner.

Understanding Private Mortgage Insurance

Private Mortgage Insurance (PMI) functions as an insurance policy that safeguards the mortgage lender, not the homeowner, against potential losses if a borrower stops making loan payments. Lenders typically require PMI for conventional loans when the loan-to-value (LTV) ratio exceeds 80%, meaning the borrower has less than 20% equity in the home. This requirement reduces the lender’s risk exposure for loans with lower down payments.

The most common form of PMI is Borrower-Paid PMI (BPMI), which is included as a regular monthly payment alongside the principal and interest of the mortgage. This allows borrowers to spread the cost over time. Another option is Lender-Paid PMI (LPMI), where the lender covers the upfront PMI cost, often in exchange for a slightly higher interest rate on the loan. Single-premium PMI involves a one-time, upfront payment at closing, which can sometimes be rolled into the loan itself.

Federal Housing Administration (FHA) loans require Mortgage Insurance Premiums (MIP), consisting of both an upfront fee and annual premiums. Department of Veterans Affairs (VA) loans do not have PMI but instead include a funding fee. These government-backed insurance programs operate differently and have their own specific requirements for termination.

Determining Your PMI Cost

The cost of Private Mortgage Insurance is not fixed; it varies based on several factors unique to each borrower and loan. One significant determinant is the loan-to-value (LTV) ratio, which compares the loan amount to the home’s value. A higher LTV, resulting from a smaller down payment, generally leads to a higher PMI rate because it signifies greater risk for the lender.

A borrower’s credit score also plays a substantial role in determining PMI costs. Individuals with higher credit scores typically qualify for lower PMI rates, reflecting their lower perceived risk to lenders. The type of mortgage, such as a fixed-rate versus an adjustable-rate mortgage, can influence the rate, with adjustable-rate mortgages sometimes carrying higher PMI due to their inherent risk. Other elements influencing the cost include the loan amount, the specific lender, and the property type.

PMI rates typically range from approximately 0.3% to 1.5% of the original loan amount annually. To illustrate, consider a home priced at $750,000, with a borrower making a 10% down payment, resulting in a loan of $675,000. If the annual PMI rate is 0.75%, the annual PMI would be $5,062.50, or approximately $421.88 monthly. On average, homeowners might expect to pay between $30 and $70 per month for every $100,000 borrowed.

Removing Private Mortgage Insurance

Homeowners can eliminate Private Mortgage Insurance payments through several avenues, primarily governed by the Homeowners Protection Act (HPA) of 1998. This federal law provides specific guidelines for the cancellation and automatic termination of PMI for most conventional loans originated after July 29, 1999.

Under the HPA, PMI is automatically terminated when the principal balance of the mortgage reaches 78% of the home’s original value, assuming the borrower is current on their payments. The original value is generally the lesser of the sales price or the appraised value at the time of purchase. Lenders are required to notify borrowers of this automatic termination.

Borrowers can also proactively request PMI cancellation once their principal balance reaches 80% of the original value of the home. To qualify for this borrower-requested cancellation, a homeowner typically needs to have a good payment history, and the property should not have declined in value. The lender may require a new appraisal to confirm the property’s current value, especially if the borrower is relying on appreciation to reach the 80% equity threshold.

Making extra principal payments is an effective way to accelerate reaching the 80% or 78% LTV thresholds, thereby reducing the time PMI is required. By applying additional funds directly to the loan’s principal, the balance decreases faster than the original amortization schedule.

Another method to remove PMI is through refinancing the mortgage. If a homeowner refinances into a new loan with at least 20% equity, PMI will not be required for the new loan. This can be particularly beneficial if interest rates have decreased or if the home’s value has significantly increased.

A substantial increase in home value can also lead to earlier PMI cancellation. If the market value of the home rises significantly, reducing the LTV, a homeowner can request an appraisal to demonstrate sufficient equity. However, some lenders may have seasoning requirements, meaning a certain period must pass before an appraisal based on increased value is accepted for PMI removal.