Private Mortgage Insurance (PMI)
What is PMI?
If you make a down payment of less than 20% of the purchase
price of the home, mortgage lenders generally require that
you take out Private Mortgage Insurance (PMI) that protects
the lender incase you default on your mortgage. You may need
to pay up to a year’s worth of premium for this coverage at
closing, which can amount to as much as several hundred
dollars. One obvious way to avoid this extra cost is to make
a 20% down payment. There are also other ways to eliminate
PMI such as 80-10-10 financing which is further described in
this section.
How does PMI work?
PMI companies write insurance protecting approximately the
top 20% of the mortgage against default, depending on the
lender’s and investor’s requirements, the loan-to-value
ratio, and the particular loan program involved. Should a
default occur, the lender sells the property to liquidate
the debt, and is reimbursed by the PMI company for any
remaining amount up to the policy value.
What does PMI cost?
Costs vary from insurer to insurer, as well as from plan to
plan. For example, a highly leveraged adjustable rate
mortgage would require the borrower to pay a higher premium
to obtain coverage. Buyers with 5% down payment can expect
to pay a premium of approximately 0.78% times the annual
loan amount ($92.67 monthly for a $150,000 purchase price).
But the PMI premium would drop to around 0.52% times the
annual loan amount ($58.50 monthly) if a 10% down payment
was made on the loan.
How is PMI paid?
PMI fees can be paid in several ways, depending on the PMI
company used. Borrowers can choose to pay the first-year
premium at closing; then an annual renewal premium is
collected monthly as part of the house payment. Or the
borrower can choose to pay no premium at closing, but add on
a slightly higher premium monthly to the principal,
interest, tax, and insurance payment. Buyers who want to
sidestep paying PMI at closing but not increase their
monthly house payment can finance a lump-sum PMI premium
into their loan. With this type of payment plan, should the
PMI be canceled before the loan term expires (through
refinancing, paying off the loan, or removal by the loan
servicer), the buyers may obtain the rebate of the premium.
Cancellation of PMI
The Homeowners Protection Act of 1998 - which became
effective in 1999 - establishes rules for 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. 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.
One exception is if your loan is "high-risk." Another is if
you have not been current on your payments within the year
prior to the time for termination or cancellation. A third
is if you have other liens on your property. For these
loans, your PMI may continue. Ask your lender or mortgage
servicer (a company that collects your payments) for more
information about these requirements.
If you signed your mortgage before July 29, 1999, you can
ask to have the PMI canceled once you exceed 20 percent
equity in your home. But federal law does not require your
lender or mortgage servicer to cancel the insurance.
