Private Mortgage Insurance (PMI)
In this section, you will find answers to the most
frequent questions we receive about private mortgage insurance or
Private Mortgage Insurance. If you have a question we do not address
about private mortgage insurance, please ask us directly! Please check
our Mortgage Terms Glossary for
commonly used mortgage terminology.
If you make a down payment of less than 20% of the
purchase price of the home, mortgage lenders generally require that you
take out Private Mortgage Insurance (Private Mortgage Insurance) that
protects the lender in case you default on your mortgage. You may need
to pay up to a year’s worth of premium for this coverage at closing.
One obvious way to avoid this extra cost is to make a 20% down payment.
There are also other ways to eliminate Private Mortgage Insurance such
as 80-10-10 financing which is further described in this section.
Private Mortgage Insurance companies write
insurance protecting approximately the top 20% of the mortgage against
default, depending on the lender’s and investor’s requirements, the
loan-to-value ratio, and the particular loan program involved. Should a
default occur, the lender sells the property to liquidate the debt, and
is reimbursed by the Private Mortgage Insurance company for any
remaining amount up to the policy value.
Yes. Let’s say that you are a family with $42,000
annual gross income and monthly revolving debts of $800 (car payment
and credit cards) and have $10,000 for a down payment and closing costs
on a mortgage at 7% interest. Without Private Mortgage Insurance, the
maximum price you can afford is $44,600. But with private mortgage
insurance covering the lender’s risk, you can buy a house worth
$62,300. Private Mortgage Insurance has afforded you 39% more house.
Costs vary from insurer to insurer, as well as
from plan to plan. For example, a highly leveraged adjustable rate
mortgage would require the borrower to pay a higher premium to obtain
coverage. Buyers with 5% down payment can expect to pay a premium of
approximately 0.78% times the annual loan amount ($92.67 monthly for a
$150,000 purchase price). But the Private Mortgage Insurance premium
would drop to around 0.52% times the annual loan amount ($58.50
monthly) if a 10% down payment was made on the loan.
Private Mortgage Insurance fees can be paid in
several ways, depending on the Private Mortgage Insurance company used.
Borrowers can choose to pay the first-year premium at closing; then an
annual renewal premium is collected monthly as part of the house
payment. Or the borrower can choose to pay no premium at closing, but
add on a slightly higher premium monthly to the principal, interest,
tax, and insurance payment. Buyers who want to sidestep paying Private
Mortgage Insurance at closing but not increase their monthly house
payment can finance a lump-sum Private Mortgage Insurance premium into
their loan. With this type of payment plan, should the Private Mortgage
Insurance be canceled before the loan term expires (through
refinancing, paying off the loan, or removal by the loan servicer), the
buyers may obtain the rebate of the premium.
Although the buyer typically bears the cost of
Private Mortgage Insurance, the lender is the Private Mortgage
Insurance company’s client, and shops for the Private Mortgage
Insurance on behalf of the borrower. Many lenders deal with only a few
Private Mortgage Insurance companies because they know the guidelines
for those insurers. This can be a problem when one of the lender’s
prime companies turns down a loan because the borrower doesn't fit its
risk parameters. An un-enterprising lender might follow suit and deny
approval on the loan application without consulting even a second
Private Mortgage Insurance company. This obviously could leave all the
parties involved in an undesirable position.
The lender has an increasingly difficult task to
be fair to the borrower while shopping for the most effective method to
soften liability. Sometimes, it may appear that a lender has no
justification for doing what he or she does – but if we look deeper, it
is undoubtedly there.
Surprising as it may seem, some folks with hefty
incomes find that it’s mighty tough for them to save enough money to
make a 20% cash down payment on their dream homes. Using conventional
financing, such buyers must purchase Private Mortgage Insurance
(Private Mortgage Insurance) which increases the cost of home ownership
and, ironically, makes it even more difficult to qualify for the
mortgage. However, if you’re a dues-paying member of the
cash-challenged class, don’t despair. Given that your income is
sufficiently high, it’s eminently possible to avoid getting stuck with
Private Mortgage Insurance. That is why 80-10-10 financing was
invented. It is called 80-10-10 because a savings and loan association,
bank, or other institutional lender provides a traditional 80% first
mortgage, you get a 10% second mortgage, and make a cash down payment
equal to 10% of the home’s purchase price. By using this method, you
are no longer obligated to take out Private Mortgage Insurance on your
property.
The same principle applies if you can only afford
to make a 5% down, 80-15-5 financing is also available. However,
because a smaller cash down payment increases the lender’s risk of
default, do not be surprised when you are asked to pay higher loan fees
and a higher mortgage interest rate for 80-15-5 than you pay for
80-10-10.
The Homeowners Protection Act of 1998 - which
became effective in 1999 - establishes rules for automatic termination
and borrower cancellation of Private Mortgage Insurance on home
mortgages. These protections apply to certain home mortgages signed on
or after July 29, 1999 for the purchase, initial construction, or
refinance of a single-family home. These protections do not apply to
government-insured FHA or VA loans or to loans with lender-paid Private
Mortgage Insurance.
For home mortgages signed on or after July 29,
1999, your Private Mortgage Insurance must - with certain exceptions -
be terminated automatically when you reach 22 percent equity in your
home based on the original property value, if your mortgage payments
are current. Your Private Mortgage Insurance also can be canceled, when
you request - with certain exceptions - when you reach 20 percent
equity in your home based on the original property value, if your
mortgage payments are current.
One exception is if your loan is "high-risk."
Another is if you have not been current on your payments within the
year prior to the time for termination or cancellation. A third is if
you have other liens on your property. For these loans, your Private
Mortgage Insurance may continue. Ask your lender or mortgage servicer
(a company that collects your payments) for more information about
these requirements.
If you signed your mortgage before July 29, 1999,
you can ask to have the Private Mortgage Insurance canceled once you
exceed 20 percent equity in your home. But federal law does not require
your lender or mortgage servicer to cancel the insurance
Private Mortgage Insurance originated in the 1950s
with the first large carrier, Mortgage Guaranty Insurance Corporation
(MGIC), referred to as “magic”. For this reason, early Private Mortgage
Insurance methods were deemed to “magically” assist in getting lender
approval on an otherwise unacceptable loan package. Today, there are
eight Private Mortgage Insurance insurance underwriting companies in
the United States.
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