You pay for PMI as part of your monthly escrow payment. That means in addition to paying your property taxes and homeowner's insurance into your escrow account, you also pay your monthly PMI fee into the escrow account as well.
Lenders collect monies on escrow and remits to PMI when the premium is due. Typically lenders collect 14 months of premiums at a home loan closing. Twelve months of the premium is paid to PMI as the initial premium. The remaining two months are used to start the escrow account.
Even if you don't ask your servicer to cancel PMI, in general, your servicer must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. For your PMI to be cancelled on that date, you need to be current on your payments.
The requirement to buy PMI usually also applies to refinancing a conventional loan, when your equity is less than 20 percent of the value of your home. PMI is arranged by the lender and provided by private insurance companies. It insures the lender against loss caused by borrowers failing to make loan payments.
When you pay your mortgage, a portion of the overall payment is set aside in your escrow account to pay for your homeowners insurance and property taxes (and mortgage insurance if your lender requires it). Your insurance and property taxes are automatically paid from the escrow account when they're due.
A borrower can request PMI be canceled when they've amassed 20 percent equity in the home and lived in it for several years. There are other ways to get rid of PMI ahead of schedule: refinancing, getting the home re-appraised (to see if it's increased in value), and paying down your principal faster.
Cons. You might pay fees for the escrow account opening and management. Your mortgage payments include taxes and insurance, so getting behind in your mortgage payments could also leave you delinquent on your taxes and insurance. Prepaying mortgage and interest reduces cash reserves you could put toward another use.
If you buy a $300,000 home, you could be paying somewhere between $600 – $6,000 per year in mortgage insurance. This cost is broken into monthly installments to make it more affordable. In this example, you're likely looking at paying $50 – $500 per month.
If you can easily afford it, you should probably put 20% down on a house. You'll avoid paying for private mortgage insurance, and you'll have a lower loan amount and smaller monthly payments to worry about. You could save a lot of money in the long run.
PMI is usually paid monthly as part of the overall mortgage payment to the lender, but sometimes it is paid as a one-time, up-front premium at closing. PMI isn't permanent—it can be dropped once a borrower pays down enough of the mortgage's principal.
Get an Appraisal
Many lenders (like Fannie Mae) also require a two-year “seasoning requirement,” meaning you can't have PMI removed until you've made two years' worth of on-time payments—even if your equity has grown above 20%. If it's been less than five years, you might even be required to have 25% worth of equity.
Most people stop paying PMI when they've gained enough equity in their homes after paying down the mortgage for a number of years. You can also cancel PMI if your home value increases earlier than you would have been able to, but you'll need to get an official appraisal showing what your home is worth.
Your mortgage servicer is required to cancel your PMI for free when your mortgage balance reaches 78% of the home's value, or the mortgage hits the halfway point of the loan term, such as the 15th year of a 30-year mortgage.
PMI will automatically be removed from your monthly mortgage payment after your loan amount reaches 78% of the home's appraised value. You can get rid of PMI early by requesting PMI cancellation as soon as you reach the 80% mark, but your lender will not remove it at this point unless you explicitly ask for it.
Generally, mortgage escrow accounts are used to collect and pay property taxes and insurance payments on a home. Lenders want to make sure that your property is insured and that the taxes are paid on time, reducing the risk to the bank that you will default on the loan or incur liens on the property.
Refinance or modify your mortgage. If you can refinance your mortgage to a lower interest rate, then you can lower your overall mortgage payment — potentially offsetting a larger escrow account balance requirement. You can also use refinancing or modification as a means of extending your loan term.
Virtually every lender requires PMI for conventional mortgages with a down payment less than 20 percent. Some lenders advertise “no-PMI” loans, but these are essentially lender-paid insurance arrangements — you'll likely pay a higher interest rate in exchange.
Put 10% Down with No PMI by Using a Piggyback Loan
A piggyback loan, or a 80/10/10 mortgage, allows you to finance 80% of a home through a mortgage. Then, you put down 10% in cash. The other 10% required to make up a 20% down payment comes from a second loan, worth 10% of the home's value.
For a little more than a decade, PMI was tax deductible for homeowners who met eligibility requirements and itemized their deductions. Since the 2022 tax year, it's no longer possible to take deductions on new mortgage insurance payments, as the PMI deduction has expired.
When does PMI go away? When your loan balance reaches 78% of the home's original purchase price, your lender must automatically terminate your PMI. You can also request that your PMI be removed when you have 20% equity in your home.
Also called “upfront PMI,” this option allows you to pay the entire premium in one lump sum at your mortgage closing.
To have your escrow account removed from your mortgage, you'll likely need: Less than 80% LTV on a conventional loan (no more than 90% LTV for a VA loan) No delinquencies within the last year and – depending on your investor – no 60-day delinquencies within the last 2 years.
Avoiding escrow could also be a good move if you want to be sure that your mortgage payments are the same from month to month. If you have an escrow account and your property tax bill or your insurance premiums suddenly jump, you might not be aware of the change until the end of the year.
Julie notes that, “There are several reasons why escrow can fall through. The buyer can't sell their current home... the buyers are unable obtain loan approval, bank appraisal issues, qualifying issues, and sometimes the buyer experiences remorse.