Private Mortgage Insurance (PMI)
- What is Private Mortgage Insurance (PMI)?
- How Does Private Mortgage Insurance (PMI) Work?
- How Much Does Private Mortgage Insurance (PMI) Cost?
- How is Private Mortgage Insurance Paid?
- How Does the Buyer Apply for PMI?
- Could Obtaining Private Mortgage Insurance (PMI) Help Me Qualify for a Larger Loan?
- Cancellation of Private Mortgage Insurance (PMI)
- What is the History of Private Mortgage Insurance (PMI)?
What is Private Mortgage Insurance (PMI)?
For a conventional mortgage, when you put down less than 20% of the purchase price of the home, mortgage lenders try to lower their risk of loss by requiring you to obtain Private Mortgage Insurance (PMI). Generally you will pay PMI with each monthly mortgage payment. Alternatively, you might be able to pay up to one year's worth of PMI premiums at closing. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options.
How Does Private Mortgage Insurance (PMI) Work?
PMI companies write insurance policies to protect approximately the top 20% of the mortgage against default. This depends on the lender's and investor's requirements, the loan-to-value ratio, and the type of loan program involved. Should a default occur and the lender sells the property to liquidate the debt, the lender is reimbursed by the PMI company for an amount up to the policy value.
How Much Does Private Mortgage Insurance (PMI) Cost?
PMI costs vary from insurer to insurer and from plan to plan. Example: A highly leveraged adjustable-rate mortgage requires the borrower to pay a higher premium to get coverage. Assuming a $150,000 purchase price, buyers with a 5% down payment can expect to pay a premium of approximately 0.78% times the annual loan amount ($92.67 monthly). But, with a 10% down payment the PMI premium drops to 0.52% times the annual amount ($58.50 monthly).
How is Private Mortgage Insurance Paid?
PMI fees can be paid in several ways, depending on the company used:
- Borrowers can choose to pay a larger, one-time-only PMI premium at closing and avoid the monthly PMI premium; OR,
- Borrowers can choose to pay PMI together with the monthly mortgage payment; OR,
- Borrowers can choose to pay a smaller one-year PMI premium at closing, then a monthly premium that is smaller than the monthly-only premiuman, above.
Borrowers who want to sidestep paying PMI at closing and who don't want to increase their monthly house payment can finance a lump-sum PMI premium into their loan. Should the PMI be canceled before the loan term expires through refinancing, paying off the loan, or removal by the loan provider, the borrower might be able to obtain a rebate of part of the PMI premium.
How Does the Buyer Apply for PMI?
Typically the buyer covers the cost of PMI, but the lender is the PMI company's client and shops for insurance on behalf of the borrower. Lenders usually deal with only a few PMI companies because they know the guidelines for those insurers. This can be a problem when one of the lender's prime PMI companies turns down a loan because the borrower doesn’t fit its risk parameters. A lender might follow suit and deny the loan application without consulting a second PMI company which could leave all parties in an undesirable position. The lender has the difficult task of being fair to the borrower while shopping for the most effective way to lessen liability.
Could Obtaining Private Mortgage Insurance (PMI) Help Me Qualify for a Larger Loan?
Yes, it will help you obtain a larger loan. Here’s why: let's say that you are a family with $42,000 Annual Gross Income and monthly revolving debts of $800 for car payment and credit cards. You have $10,000 for your down payment and closing costs on a 7%-interest mortgage. Without PMI the maximum price you can afford is $44,600, but with PMI covering the lender's risk you now can buy a $62,300 house. PMI has afforded you 39% more house.
Cancellation of Private Mortgage Insurance (PMI)
The Home Ownership and Equity Protection Act (HOEPA), passed in 1994 and amended in 2013, established rules for automatic termination and borrower cancellation of Private Mortgage Insurance (PMI) for home mortgages. The 2013 amendments provide protections and rights to certain home mortgage applications taken on or after January 10, 2014 for the purchase, initial construction, or refinance of a single-family home. It does not apply to government-insured FHA or VA loans, or to loans with lender-paid PMI.
Subject to certain exceptions1, PMI can be terminated in two ways:
- Your PMI must terminate automatically when your loan-to-value ration (LTV) reaches 78% of the original value(that is, you have 22% equity in your home based on the purchase price of the loan in a purchase or the appraissed value in a refinance); or,
- When your LTV reaches 80%, you can request that the PMI be eliminated is reached (based on the original property value, with the additional requirement that your mortgage payments have not been late for the last 12 months).
Ask your lender or mortgage servicer for information about these requirements. If you signed your mortgage before July 29, 1999 you can request to have the PMI canceled once you exceed 20% home equity. But, federal law does not require your lender or mortgage servicer to cancel the insurance.
- If your loan is "high risk";
- You have not been current on your payments within the year prior to termination time or cancellation; or,
- If you have other liens on your property.
What is the History of Private Mortgage Insurance (PMI)?
The Private Mortgage Insurance industry originated in the 1950's with the first large carrier, Mortgage Guaranty Insurance Corporation (MGIC). They were referred to as "magic" as these early PMI methods were deemed to "magically" assist in getting lender approval on otherwise unacceptable loan packages. Today there are 8 PMI underwriting companies in the United States.