What is Private Mortgage Insurance or (PMI)?

Private Mortgage Insurance is a way to enhance a borrower’s ability to achieve a homeownership situation that is right for them. PMI helps borrowers obtain a low down payment loan. Lenders require PMI on most conventional mortgages because of the relationship between borrower equity and default. Time and past experience has shown that the less a borrower has invested in a home the greater chance of default. PMI provides a financial guarantee against loss on the lender’s part in case the borrower defaults. This financial guarantee is what allows lenders to provide loans with a low down payment.

Private mortgage insurance can be paid on either an annual, monthly or single premium plan. Premiums are based on the amount and terms of the mortgage and will vary according to loan-to-value ratio, type of loan, and amount of coverage required by the mortgage company.

Under an annual plan, an initial one year premium is collected up front at closing, with monthly payments collected along with the mortgage payment each month thereafter. Monthly plans allow a borrower to pay only 1 or 2 months worth of premium at closing, and then on a monthly basis along with the regular mortgage payment. Under a single premium plan, the entire premium covering several years is paid in a lump sum at closing. Typically, homebuyers choose to add the amount of the mortgage insurance premium to the loan amount. By doing this, homebuyers can reduce their closing costs and increase their interest deduction.

While PMI is helpful to future homeowners, it can also be expensive. On a $100,000 loan with 10 percent down ($10,000), PMI might cost you $40 a month. You can check your annual escrow account or call your lender to find out how much your PMI is costing you each month. The range for a median priced home is $50 to $80 per month (In 2001 the national median price for a single family home was $147,500).

To help protect homeowners from pricey PMI’s in 1998 legislation created the Homeowners Protection Act. The Homeowners Protection Act of 1998 – which became effective in 1999 – establishes rules for the automatic termination and borrower cancellation of PMI 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. In some states though there are laws that apply to early termination or deletion of PMI. These protections do not apply to government-insured FHA or VA loans or to loans with lender-paid PMI.

For home mortgages signed on or after July 29, 1999, your PMI 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 PMI 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. Another exception is if your loan is “high-risk.”

The HPA (Homeowners Protection Act) has established three times when a lender must notify the borrower of his or her rights. Those times are at loan closing, each year during the loan, and upon cancellation or termination of PMI.

The content of these disclosures varies depending on whether: (1) PMI is "borrower-paid PMI" or "lender-paid PMI," (2) the loan is classified as a "fixed rate mortgage" or "adjustable rate mortgage," or (3) the loan is designated as "high risk" or not.

At loan closing, lenders are required to disclose all of the following to borrowers:

• The right to request cancellation of PMI and the date on which this request may be made.
• The requirement that PMI be automatically terminated and the date on which this will occur.
• Any exemptions to the right to cancellation or automatic termination.
• A written initial amortization schedule (fixed-rate loans only).

Annually, your mortgage loan servicer must send borrowers a written statement that discloses:

• The right to cancel or terminate PMI.
• An address and telephone number to contact the loan servicer to determine when PMI may be canceled.

When the PMI coverage is canceled or terminated, a notification must be sent to the consumer stating that:

• PMI has been terminated, and the borrower no longer has PMI coverage.
• No further PMI premiums are due.

The obligation for providing notice of cancellation or termination is with the servicer or lender of the mortgage.

What happens if your home value has increased?

Before cancellation of PMI can occur the lender requires that 20% of your home’s equity has been paid off. If the home prices in your area are rising fast, your property value is probably rising also. Or, if you have done home improvements on your house, this can raise your property value. If this is the case you may be able to reach the 80% percent of the loan value a lot faster, allowing you to cancel your PMI in a shorter amount of time.

Is it possible to get PMI if you have a low income?

Yes. If you are a lower-income first-time buyer, you might be eligible for certain programs that make it possible for you to buy a home with 3% or less down. Their flexibility makes it possible for many lower-income buyers to achieve homeownership. The Programs are fitted to suit community needs and involve partnerships with local groups. They feature education programs that help you learn about the home buying process and counseling to help you keep your home if you run into financial trouble. They also offer a variety of options in such areas as down payment, PrivateMI premium and credit verification. Evidence of on-time rent and utility payments, for example can substitute for a more traditional credit history. Check with your lender to see if you’re qualified for an affordable housing program.

Can I buy PrivateMI directly from an insurance company instead of through a lender?

No. The lender arranges for PMI coverage on your loan. A variety of PMI products with a different range of payment options is available to meet your specific needs. When you shop for a loan, ask lenders about your PMI options.

What’s the difference between PMI and FHA (Federal Housing Administration) insurance?

PMI is from a private insurance while FHA is a government program backed by taxpayers. PMI usually costs less and it only covers the top 20 to 30 percent of a loan, while FHA insures 100 percent of the loan. PMI is also available on a wider variety of loan products, and there’s no maximum loan amount. FHA loans are subject to maximum loan amounts, depending on the cost of housing in your area.

Ways to avoid PMI:

There are several ways to avoid paying the high cost of PMI. All are completely normal and are done many times each day.

The first way is to split your home loan into two loans. A regular loan at the 80% range which gets rid of the PMI and a second HELOC (home equity line of credit) for the remaining 15% of the loan. They call this a 80-15-5 - 80% first loan, 15% HELOC, 5% equity paid by the consumer. We typically don't recommend having less than 5% equity. If you can't cough up 5% equity to buy a home, you probably should look for a cheaper home.

The second way to avoid paying PMI is to go with a private lender. There are many "private" lenders who aren't required to tack on the PMI, and still have equally competetive interest rates.

The third and hardest way to avoid PMI is to pay down your loan to 80%. Then there is less risk on the lenders part and the lender is willing to take off the PMI safeguard.

Click Here to Apply for a Mortgage Quote