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The Basics of Private Mortgage Insurance (PMI)

What is PMI?

Private Mortgage Insurance (PMI) is insurance you buy through a lender that will enable you to obtain a mortgage with a lower down payment.  This ensures the lender that they are protected against financial loss if you default on your loan.  You only need to purchase PMI if your down payment on a home is less than 20 percent of the sale price or appraised value of the home. 

What are the benefits of PMI?

PMI has its advantages and plays an important role in the mortgage industry.  Private Mortgage Insurance:

  • Protects lenders against loss if a borrower defaults on a loan
  • Enables borrowers with less cash to have greater access to homeownership
  • Allows potential homeowners to buy a home with as little as a 3 % to 5 % down payment — helping them to buy a home sooner without waiting years to accumulate a large down payment

What are the rules of PMI?

A law called, The Homeowner's Protection Act (HPA) of 1998, establishes rules for the automatic termination and borrower cancellation of PMI on home mortgages.   This protection applies to home mortgages signed on or after July 29, 1999.  For these mortgages, PMI is automatically terminated when you reach 22 percent equity in your home. (Note: the equity is based on the original value of the home and if your mortgage payments are up-to-date.)
The HPA of 1998 also protects mortgages signed before July 29, 1999, stating that PMI can be cancelled, but will not be automatically done so, after the borrower exceeds 20 percent equity in their home.
However, there are exceptions to the law. Some examples of these exceptions are: if a loan is labeled "high-risk;" or if the borrower was not current on their payments within the year prior to the time for termination or cancellation; or if there is a lien on the property, PMI may continue.

How Can I avoid PMI?

Even though many borrowers would rather not pay PMI, most cannot get around it.  However, there are a few ways that a borrower could avoid paying PMI:

  • Put a 20 percent down payment at the time of the loan — lenders won’t require PMI when the loan value is 80% or less  
  • Apply for additional financing (i.e. a home equity loan or line of credit) and close on that financing at the same time as your first mortgage
  • Use a sub-prime or B-Credit lender. (Be careful:  These have higher interest rates, but they are tax deductible (PMI is not tax deductible)

 
How Much Is PMI?

The cost of PMI varies and depends on three variables:

  • The percentage the borrower puts down on the home
  • The type of loan
  • The amount of coverage 

PMI premiums are usually .50 % of the loan for the first year and decrease over the subsequent years of the loan.  Most borrowers opt to pay the first year premium in advance at the closing.

 
   
 
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