Private Mortgage Insurance
What is Private Mortgage Insurance?
Private Mortgage Insurance, more commonly known as PMI, is a special type of insurance policy that protects lenders against loss in the event of a borrower defaulting on mortgage payments.
A large majority of lenders require PMI for homeowners who make a down payment of less than 20% of the purchase price of a home. In the mortgage industry, the risk a mortgage presents is measured through its loan to value (LTV) ratio. The higher the LTV ratio, the higher the risk for defaults. A mortgage with an LTV in excess of 80% require a PMI.
Admittedly, PMI is an added monthly cost for the borrower. However, PMI is what often allows borrowers to obtain financing even if they can only afford a down payment of 5% to 19% (technically, 19.99%) of a home’s purchase price.
How long does one pay PMI? The monthly payment is made until such time that enough equity is accumulated in the home so that the borrower and the mortgage is no longer considered high-risk. The Homeowners Protection Act stipulates that PMI be automatically cancelled once the mortgage LTV drops to 78%. This means that down payment plus any loan principal payments already made has reached 22% of the property’s purchase price.
How much PMI does one pay? The typical cost is about 0.5 to 1% of the loan balance per year but can go as low as 0.25% and as high as 2%. The risk factors determine the rate that is paid. The size of the down payment and the mortgage, the loan term and a borrower’s credit score are factors that are taken into consideration when determining how much PMI payment amount is rquired.
Types of PMI
Borrower-Paid PMI. A premium is paid every month until the PMI is automatically terminated, that is if the LTV is already at 78%, or at the request of cancellation by the borrower. This will be discussed in more detail below.
Single Premium PMI. The PMI premium is paid lump sum, either settled in full at closing or financed into the mortgage. While it is an upfront expense, this may be the money saving option for long-term homeowners.
Lender-Paid PMI. With this type, it is the lender that pays the PMI on behalf of the borrower. While this may look like an attractive option due to the resulting lower monthly mortgage payment, be aware that this also results in paying more interest over the duration of the loan. The rates are also higher for this type of PMI since the cost is included in the mortgage interest rate. Additionally, since it becomes permanently part of the loan, PMI cannot be cancelled once LTV reaches 78%.
Can You Remove PMI from Your Loan?
The PMI represents a substantial amount and borrowers often ask if it can be avoided. The simple answer is this - unless one can pay the 20% down payment, there is no way around it. But it can be removed quickly. Below is a guideline provided by Chase Bank to remove PMI from your loan:
As mentioned above, PMI is automatically terminated when LTV is already at 78%, or at the request of cancellation by the borrower when LTV reaches 80%.
In the latter case, the borrower would need to satisfy the following conditions:
Borrower must submit a request for cancellation to the servicer at the address specified by the servicer
The borrower must have a good payment history with respect to the transaction
The current value of the property must not have declined below the original value of the property, as determined by the servicer. The term “original value of the property” is defined as the lesser of the sales price or appraised value.
It should satisfy the requirements of the servicer that the equity in the property securing the loan in unencumbered by any subordinate lien.
Can You Remove PMI from Your Loan?
If you have questions about PMI and any other concerns when buying a house, I can help. I am experienced and results-oriented. If you are interested in potentially selling your home, and would like to know what it’s worth, click here.
I am always happy to answer any questions. Call me at 1-951-333-8065.
Tags: Private Mortgage Insurance, PMI, LTV, home equity, mortgage down payment