Buying your first home in Prospect Heights and hearing a lot about PMI? You are not alone. Private mortgage insurance can be confusing, especially when you are trying to budget your monthly payment. In this guide, you will learn what PMI is, when it applies in Illinois, how much it typically costs, how and when you can remove it, and what local assistance programs might change your down payment plan. Let’s dive in.
What PMI is and when you need it
Private mortgage insurance, or PMI, protects the lender if you default on a conventional loan when your equity is low. You usually see PMI on conventional loans when the loan-to-value ratio is above 80 percent. In simple terms, if your down payment is less than 20 percent, PMI often applies.
PMI is not the same as FHA mortgage insurance. FHA loans use mortgage insurance premiums, often called MIP, under a different set of rules. VA and USDA loans do not use PMI, although they have separate guarantees or fees.
How PMI affects your payment
PMI adds to your monthly housing cost. The price depends on your credit score, your initial loan-to-value ratio, your loan size, and the PMI structure you choose. A typical annual range is about 0.3 percent to 1.5 percent of the original loan amount.
Common payment structures include:
- Borrower-paid monthly PMI that is added to your mortgage payment.
- Single-premium PMI that you pay upfront at closing to lower your monthly cost.
- Split-premium PMI that mixes a smaller upfront payment with a reduced monthly cost.
- Lender-paid PMI where the lender covers the premium and you accept a slightly higher interest rate. This removes a separate PMI line item, but the higher rate remains until you refinance.
A quick example
Here is a simple illustration. Say the home price is $350,000 and you put 5 percent down, or $17,500. Your loan amount is $332,500. If your PMI rate is 0.75 percent, the annual PMI is 0.0075 times $332,500, which equals $2,493.75. Divide by 12 and your monthly PMI is about $208, which is added to your principal, interest, taxes, and insurance. Your exact quote will depend on your lender and insurer.
Impact on buying power
Because PMI increases the monthly payment, it can reduce the price you qualify for with a given income. If you choose lender-paid PMI, the higher interest rate increases long-term cost and cannot be removed without refinancing. When you compare loans, look at the total monthly payment and the APR for both borrower-paid and lender-paid options.
Removing PMI on conventional loans
Federal rules give you protections on conventional mortgages. You can request PMI cancellation when your principal balance reaches 80 percent of the original property value, as long as you are current on payments and meet your servicer’s other conditions. These conditions can include an appraisal, no other liens, and a good payment history.
PMI must be canceled automatically at 78 percent of the original value, based on the original amortization schedule, if your loan is current. Lenders also must give you disclosures at closing that explain how your PMI works and send you annual updates on your PMI status.
To request cancellation at 80 percent, plan to:
- Send a written request to your loan servicer.
- Keep an on-time payment record and be prepared for an appraisal if required.
- Confirm that there are no second liens on your property.
Extra principal payments can help you reach the 80 percent mark sooner. Keep good records so the process goes smoothly when you are eligible.
FHA, VA, and USDA: key differences
FHA loans require mortgage insurance premiums under different rules than conventional PMI. For FHA loans with case numbers assigned on or after June 3, 2013, if your original loan-to-value was greater than 90 percent, annual MIP lasts for the life of the loan. If your original loan-to-value was 90 percent or less, MIP is required for 11 years.
VA and USDA loans do not have PMI. They use other fee or guarantee structures and have specific eligibility, income, or geography rules. If you start with FHA for affordability, many buyers plan to refinance into a conventional loan later to remove long-term MIP once they have at least 20 percent equity and a qualifying credit profile.
Illinois and Prospect Heights considerations
First-time buyers in Prospect Heights and the Chicago–Naperville–Arlington Heights area often compare FHA and conventional financing. The right fit depends on your down payment, your credit score, and how long you expect to keep the home.
The Illinois Housing Development Authority offers mortgage and down payment assistance programs that can reduce upfront cash needs. Program details can affect how PMI or MIP is structured, and they change over time. Cook County and the City of Chicago may also offer grants or deferred second mortgages for eligible buyers. Local lenders familiar with IHDA and regional programs can outline current options and how they interact with PMI.
If you are buying a condominium, expect additional lender requirements for project approval and reserves. Some lenders may quote different PMI costs for condos. In Illinois, taxes and homeowners insurance are usually escrowed in your monthly payment. PMI is a separate line item unless you choose lender-paid PMI that is built into the rate.
Local market conditions affect how quickly you can remove PMI. If home values rise, an appraisal may help you qualify for early cancellation at 80 percent. In a flat market, you will reach the cancellation point based on your scheduled principal reduction.
Smart strategies to reduce or avoid PMI
- Increase your down payment to 20 percent if possible to avoid PMI on a conventional loan.
- Consider a piggyback second mortgage to cover part of your down payment, understanding that second loans can be more expensive and add risk.
- Compare single-premium PMI and split-premium options if you plan to stay in the home for a while and want a lower monthly payment.
- Evaluate lender-paid PMI for shorter holding periods, keeping in mind the higher interest rate persists until you refinance.
- Look into state or local down payment assistance that may change your upfront cash and loan structure.
- Make extra principal payments to reach 80 percent faster on conventional loans.
- Refinance to a conventional loan later if you start with FHA and want to eliminate long-term MIP.
Quick buyer checklist
- Ask lenders for full quotes that show principal and interest, monthly PMI or lender-paid PMI scenarios, closing costs, and APR. Compare both monthly cost and long-term cost.
- Check Illinois assistance options, including IHDA and Cook County or City of Chicago programs, to see how they affect your down payment and PMI.
- Decide how long you expect to own the home. Shorter stays can favor lender-paid PMI, while longer stays may favor borrower-paid PMI or a larger down payment.
- Keep documentation of on-time payments and track improvements that may support your home’s value when you request PMI removal.
- Plan for potential appraisal costs if you request early cancellation at 80 percent based on current value.
- If you consider refinancing to remove PMI or MIP, compare closing costs with the expected monthly savings and calculate your break-even time.
Buying sooner with less than 20 percent down is common in Prospect Heights and across Cook County. PMI can be a helpful bridge to homeownership when you understand the costs, the removal rules, and the local programs that can support your plan. If you want a clear path from offer to closing with the right loan strategy for your timeline, let’s talk.
Ready to move forward with confidence? Connect with the C Starr Team at @properties to map your best route to homeownership.
FAQs
Do Illinois homebuyers have to pay PMI forever on conventional loans?
- No. You can request cancellation at 80 percent loan-to-value if you meet your servicer’s conditions, and PMI must end automatically at 78 percent if your loan is current.
How can I remove PMI faster on a conventional mortgage?
- Make extra principal payments to reach 80 percent sooner, keep on-time payment records, and be ready for an appraisal if your servicer requires one for early cancellation.
Is FHA or conventional cheaper for first-time buyers in Cook County?
- It depends on your credit, down payment, and time horizon. FHA can be cheaper upfront for lower credit scores, while conventional with PMI can be cheaper long term if you will reach 20 percent equity quickly or refinance.
What is lender-paid PMI and when does it make sense?
- The lender pays the premium and you take a slightly higher interest rate. It can work for shorter ownership periods, but it is harder to remove because the higher rate lasts until you refinance.
Can condo buyers in Prospect Heights face different PMI costs?
- Yes. Some lenders apply different PMI pricing or documentation for condos due to project approval and reserve requirements. Get quotes specific to the property type.
Are PMI or MIP payments tax-deductible right now?
- Tax rules change. Whether premiums are deductible depends on current federal law and your income, so it is best to ask a tax professional.
