Is Private Mortgage Insurance Included in Escrow?

Homeownership involves navigating various financial components, including Private Mortgage Insurance (PMI) and escrow accounts. These elements play distinct yet interconnected roles in managing a mortgage, particularly for borrowers with smaller down payments. Understanding how PMI and escrow accounts operate can help homeowners manage their monthly housing expenses effectively.

Understanding Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) protects the mortgage lender if a borrower defaults on their loan. It is generally required for conventional mortgages when the down payment is less than 20% of the home’s purchase price, or when refinancing results in a loan-to-value (LTV) ratio exceeding 80%. Lenders view these situations as higher risk, and PMI mitigates this risk.

PMI premiums are calculated as a percentage of the original loan amount, typically 0.3% to 1.5% annually. This percentage varies based on factors like loan amount, credit score, loan-to-value ratio, and down payment size. While an additional cost, PMI enables many to qualify for a mortgage sooner, as saving a 20% down payment can be a significant hurdle.

Understanding Escrow Accounts

An escrow account functions as a holding account managed by the mortgage lender or servicer. Its purpose is to collect and disburse funds for property-related expenses on behalf of the homeowner. These expenses commonly include property taxes and homeowner’s insurance premiums, which are large, infrequent payments.

Each month, a portion of the homeowner’s total mortgage payment is deposited into this escrow account. When property tax or insurance premiums are due, the lender uses these accumulated funds to pay the bills directly. This system provides convenience by breaking down large annual or semi-annual costs into smaller monthly installments, ensuring these obligations are paid on time. Lenders require escrow accounts, especially for loans with lower down payments, to ensure these property-related expenses are consistently covered.

PMI Payment Through Escrow

When a mortgage includes Private Mortgage Insurance (PMI) and an escrow account is established, PMI payment is integrated into the monthly mortgage payment. The total monthly housing payment collected by the lender encompasses the principal and interest, along with amounts for property taxes, homeowner’s insurance, and PMI.

The lender receives this combined payment. From the escrow account, the lender or loan servicer periodically disburses the PMI premiums directly to the private mortgage insurance company.

This process simplifies payment for the homeowner, who makes a single monthly payment to their lender. While PMI funds pass through the escrow account, PMI remains a distinct component of the overall housing expense, protecting the lender.

Canceling Private Mortgage Insurance

Homeowners can cancel Private Mortgage Insurance (PMI) once they have accumulated sufficient equity. The most common criterion for borrower-requested cancellation is when the loan-to-value (LTV) ratio reaches 80% of the home’s original value. To initiate this, the homeowner submits a written request to their mortgage servicer. Lenders require a good payment history, meaning no recent late payments, and confirmation of no junior liens, such as a second mortgage, on the property. An appraisal, paid for by the homeowner and costing between $300 to $500, may be required to confirm the property’s current value.

Beyond borrower-initiated cancellation, the Homeowners Protection Act (HPA) of 1998 mandates automatic termination of PMI under specific conditions. For most conventional loans, PMI must automatically terminate when the loan balance is scheduled to reach 78% of the home’s original value, provided the borrower is current on payments. The HPA also stipulates that PMI must terminate by the midpoint of the loan’s amortization period if the borrower is current, even if the 78% LTV threshold has not been met. These provisions ensure borrowers are not burdened with PMI indefinitely once they have built significant equity.