- 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)?
For a conventional mortgage, when you put down less than 20% of the purchase price of the home, mortgage try to lower their risk of loss by requiring you to obtain Private Mortgage Insurance (PMI). (Click here for how PMI is paid.) The best way to avoid this extra expense is to make a 20% down
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.
Private Mortgage Insurance is also referred to as Borrower-Paid Mortgage Insurance. An alternative to Borrower-Paid MI is Lender-Paid Mortgage Insurance. Click here for more information about Lender-Paid MI.
There are several large insurance companies that underwrite PMI. While there are slight differences in the monthly PMI payment between the companies, the two factors that have the greatest impact on the monthly PMI are the LTV (Loan-to-Value ratio) and the qualifying credit score. Simply put, a lower LTV and higher qualifying credit score will result in a lower monthly PMI payment. A matrix of LTV and credit score is used to calculate a rate (in percentage) for the PMI. This rate is multiplied by the loan amount to calculate the annual PMI dollar amount, which is, in turn, divided by 12 to yield the monthly PMI payment.
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 premium, 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.
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.
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
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,
Subject to certain exceptions 1, PMI can be terminated in two ways:
- Your PMI must terminate automatically when your loan-to-value ratio (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 appraised 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). Also, It can also be canceled at your request with certain exceptions, when you reach 20% equity, again based on the original property value, if your mortgage payments are current.
Ask your lender or mortgage servicer for information about these requirements. If you signed your mortgage before July 29,
- 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.
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.