Private Mortgage Insurance

Private Mortgage Insurance

Private mortgage insurance, or PMI, is insurance that most lenders require of borrowers who put less than 20% down on a home (or greater than 80% loan-to-value or LTV). In most cases, the borrower pays the cost of PMI

The purpose of PMI is to protect lenders from loss if a borrower defaults on their loan. This can give lenders the protection necessary for them to make loans to borrowers who do not have a lot of money for a down payment.

Cost of PMI

The amount of private mortgage insurance that a borrower pays varies depending on the amount of their down payment, the type of loan (ARM versus FRM), and the term of the loan. Currently (as of 2006) the typical PMI premium rates for a 30-year fixed rate mortgage (FRM) are:

Down Payment (%) Annual PMI Premium
0-4.99% .96%
5-9.99% .78%
10-14.99% .52%
15-19.99% .32%

To obtain the annual premium, multiply the premium percentage by the loan amount. To obtain the monthly payment, divide the previous number by 12.

Avoiding PMI

There are basically two ways to avoid paying private mortgage insurance:

  1. Put a down payment of 20% or more on the home.
  2. Take out a "piggyback" second mortgage for the difference between an 80% first mortgage, your down payment, and the price of the home. You may see these type of loans referred to as 80/10/10 loans, or 80/15/5 loans.

As an example of using a second mortgage to avoid PMI, assume that the house value is $100,000, and that the borrower is putting down 10% (or $10,000). The borrower would take out a primary mortgage for $80,000 (80%), put down $10,000 (10%), and take out a piggyback second mortgage for $10,000 (the remaining 10%). Please note that a borrower should make sure that the additional interest that will typically be paid on a second mortgage does not exceed the monthly PMI premium.

Canceling PMI

Home owners can typically cancel private mortgage insurance when they have 20% or more equity in their home. This can be the case when they have made enough principal payments to equal or exceed 20%. It can also be the case if the home has appreciated in value. A homeowner who suspects that their home has increased enough in value to cover the 20% requirement should contact their lender to see if they are willing to consider home appreciation for canceling PMI. Some level of documentation, such as an appraisal, will be needed to demonstrate the higher property value.

The Homeowner's Protection Act (HPA) of 1998

The Homeowner's Protection Act (HPA) applies to residential mortgages obtained on or after July 29, 1999. To qualify as a residential mortgage transaction, four requirements must be met:

  1. A mortgage or deed of trust must be created or retained
  2. The property securing the loan must be a single-family dwelling
  3. The single-family dwelling must be the primary residence of the borrower
  4. The transaction's purpose must be to finance the purchase, initial construction, or refinancing of that dwelling

The Homeowner's Protection Act requires that mortgage lenders or servicers automatically cancel PMI coverage on most loans, once the homeowner has paid down their mortgage to 78 percent of the value of their home if they are current on their loan. If the loan is delinquent, the lender must terminate the coverage as soon thereafter as the loan becomes current.

For loans that have been designated as high risk loans, mortgage lenders or servicers are required to automatically cancel private mortgage insurance once the mortgage is paid down to 77 percent of the original value of the property, provided the home owner is current on their loan.

Under HPA, PMI that has not been canceled or otherwise terminated, must be removed when the loan reaches the midpoint of its amortization period (after 180 payments for a 30 year loan).

While HPA does not require the automatic cancellation of PMI for loans made before July 29, 1999, it does require that an annual statement be sent to consumers. This annual statement should explain that under certain circumstances PMI may be canceled. Some lenders plan to comply with HPA's requirements for both new and existing loans.

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