Private mortgage insurance - Private mortgage insurance or commonly called "PMI" is insurance provided by a private company helping to protect the mortgage lender against mortgage default. Generally, this insurance is required by the lender when the down payment is less than 20% of the properly value. The lender requires the borrower to pay the insurance premiums.
Private mortgage insurance can be avoided. If you are looking to do a 100% financing loan, one option is to do an 80/20 combo loan. This allows you to avoid mortgage insurance and will provide a lower payment than if you were to pay the private mortgage insurance.
One of the most frequently misunderstood aspects of mortgaging a home, especially for first-time buyers, is Private Mortgage Insurance (PMI). The most common misconception is that PMI is a mortgage life insurance policy whereby the mortgage would be paid off should the borrower die. It is not.
Instead, PMI is an insurance that most lenders require of all borrowers who put less than 20% down. It's purpose is to protect the lender against losses should the borrower default.
Virtually all conventional mortgages with less than a 20% downpayment will dictate the inclusion of PMI. FHA mortgages, which are insured by the Federal Governement, require a different type of insurance with different coverages. The cost of PMI will depend on a number of factors, including the insurance carrier and the size of the loan, but monthly payments for the insurance will generally fall into the $25 - $100 range for median priced homes.
Some lenders now have loan programs where the lender pays the PMI and the rate is only slightly higher than it would be if the loan was under 80% of the value of the home.
Ending your private mortgage insurance early - Ending your private mortgage insurance early
Private mortgage insurance, or PMI, is the safety net of the lender. PMI benefits lenders because it guarantees payment on the balance of loans not covered by the sale of foreclosed properties.
If a borrower makes a down payment of 20% of the cost of the home, the lender can generally trust that he will make his mortgage payments faithfully to protect a large investment. In this case, the lender comes out ahead if the borrower is forced to foreclose on his house, because the lender loans 80% of the cost of the house, but will probably recover 100% of the cost of the house. But, if the borrower makes a smaller down-payment, such as 3%, 5% or 10%, and borrows the rest, and then defaults on his loan, the lender loses money.
If a house is purchased with a conventional mortgage and a down payment of less than 20 percent, PMI is almost always a requirement. The insurance benefits the lender, but the borrower pays for it. An initial premium is included in the closing costs, and a monthly amount in the house payment.
The PMI cost varies depending upon the size of the mortgage and the percentage of the down payment. If the down payment is more than 15 percent but less than 20 percent, the borrower will generally pay about 0.32 percent of the loan amount annually in PMI premiums. That totals about $40 a month for a $150,000 mortgage.
But PMI is not fool-proof. Homeowners can sometimes eliminate private mortgage insurance by refinancing their loans -- even if they continue to owe more than 80 percent of the value of the house. And there are new laws that require lenders to remove PMI if a mortgage does not exceed 80% of the value of a home. But, this new law only applies to loans recorded after July 29, 1999. If a borrower has a loan that was recorded before July 29, 1999 and thinks he might like to cancel the mortgage insurance after a few years, he could, depending on the conditions and whether the insurer allows cancellation.
The most common method used to avoid paying private mortgage insurance is for a borrower to get a "piggyback loan" - a second mortgage that allows him to make a 20 percent down payment. For example, a borrower can pay 10 percent down, get a first mortgage of 80 percent, and a second mortgage of 10 percent. The piggyback loan is always at a higher rate. The borrower is not paying for PMI, but is still making a monthly payment, probably for roughly the same amount as PMI. A piggyback loan also has an income tax advantage because it allows the borrower to deduct the interest from his taxable income. However, he can’t deduct the cost of PMI.
For homeowners who owe between 80 and 83 percent of the house’s value, the best way to avoid PMI when refinancing the loan is to find a lender that won’t immediately sell the mortgage on the secondary market. Generally, to eliminate PMI, a homeowner must have a spotless mortgage payment history and be able to fit a certain profile of borrower. Examples of good candidates include:
* A homeowner who is refinancing a mortgage and has had no late payments in the last year or two.
* Someone who is barely over the 80-percent PMI threshold. (For example, if he owes $85,000 on a $100,000 house, he probably won’t get a break on PMI, but someone who owes $82,000 might.)
* A homeowner who is otherwise creditworthy -- has a high credit score, a stable job, and a good ratio of income to debt.
Even with these credentials, the homeowner must try hard to find a lender that keeps mortgage loans on its books and is willing to take the risk. Most mortgage lenders don’t hold loans for long. They bundle mortgages together and sell them to large investors such as big banks, insurance companies, pension funds and institutions such as the Federal National Mortgage Association, known as Fannie Mae.
The reason for selling mortgages is to free up money to lend again because the original lender gets most of its money (and profit) from fees and the sale of the loan, not from interest. The investors who buy pools of loans ultimately earn the interest that borrowers pay.
PMI assures investors that their bundles of loans won’t go bad. Homeowners who put less than 20 percent down are more likely to default. That is why they’re required to have private mortgage insurance. Otherwise, the loans won’t be marketable
A way to end your private mortgage insurance very early would be to accept what is called LPMI, instead of traditional mortgage insurance. LPMI is where the lender pays your mortgage insurance instead of you for a very small increase to the interest rate. The increase to your interest rate is lower the closer you are to the 80% loan to value requirement of not needing mortgage insurance that it is if you had only 5% equity in your home. Because traditional mortgage insurance can be eliminated once you get down do 80% of the value of your home, traditional mortgage insurance would be a little cheaper in the long run if you were to keep your loan for the life of the mortgage. However, since most consumers sell or refinance every 4-5 years LPMI is an option definitely worth considering. Have your mortgage professional work up a comparison of the payments for you to see what option is most beneficial for your specific loan if you do not have 20% equity in your home and PMI, private mortgage insurance is needed on your loan.
Refinancing can be a very effective way of reducing or eliminating your Private Mortgage Insurance premium.
- If the Home has increased or appreciated in value, your old loan amount may be less than 80% of your new property value today.
- If you refinance and are still over 80%, you may qualify for a program with no private mortgage insurance or with Lender Paid Mortgage Insurance
- It should be noted that for the year 2007, Private Mortgage Insurance (PMI) is tax deductible in most cases on new mortgages and refinances taken out this year.
Lender Paid Mortgage Insurance - If a loan is above 80% LTV, many Lenders require mortgage insurance. However, many of these lenders also have programs where they pay the mortgage insurance. Some Lenders even go as far as having programs where they discount the interest rate once the LTV reaches 80%, either by gained equity in the home, or payments made, or a combination of the two factors.
You can perform a simple cost comparision to determine if the lender paid mortgage insurance has a lower cost than going with a loan where you have to pay the insurance on your own.
Even when the Private Mortgage Insurance (PMI)is paid by the Lender there is a cost involved. The alternative to a mortgage with PMI is to do a first and second mortgage. Many times the cost of the first and second mortgage will be less than the cost of a single mortgage with a PMI premium. In other cases the situation will be reversed. Your Mortgage Professional will be able to determine which alternative will be the best and most beneficial for you.
Another advantage of Lender Paid Mortgage Insurance is tax deductibility. PMI normally is not tax deductible, but with lender paid mortgage insurance the cost of the PMI is absorbed into the interest rate. Most interest payments for a mortgage are tax deductible. Be sure to ask your accountant and your mortgage broker if Lender Paid Mortgage Insurance makes since for you.
Ways around Private Mortgage Insurance (PMI) - When financing more than 80% of the value of the home you are purchasing or refinancing, there are several ways to avoid having to pay for costly private mortgage insurance.
One of the easiest, and often cheapest ways to avoid paying PMI is to do a simultaneous closing, where the borrower finances 80% of the purchase price with one loan, then finances the other 20% with a 2nd mortgage. Often times, the payments on the two mortgages end up less than if the borrower had just one loan with PMI. Plus, the interest on the 2nd could be tax-decuctible.
Another option becoming popular with lenders is to offer some form of lender paid MI. The most common way this is accomplished is through an adjustment to the interest rate. By increasing the interest rate the lender is covered for the additional risk, and the borrower has a tax advantage compared to traditional PMI.
If you have any cash to put down on the purchase, you can limit or even eliminate the need for mortgage insurance (MI) altogether. If you take out a mortgage for no more than 80% of the purchase price or appraised value you will not need MI. If you are putting down 5, 10 or 15% down you will be looking at reduced mortgage insurance rates compared to someone taking out 100% financing.
Some savvy buyers will negotiate Private Mortgage Insurance to be paid by the seller as a condition of the purchase.
Be sure to ask your Realtor or Mortgage Broker for more advice on seller concessions and single premium Private Mortgage Insurance.
One way to not get rid of PMI nor avoid it, is to finance your mortgage on a lower term than a 30 year mortgage. Lowering your mortgage term to a 20 year mortgage, or even better yet a 15 year mortgage, will reduce your PMI amount drastically. Not only will it reduce your PMI amount by a lot but it will help you to build equity in your home much quicker and pay your house off many years sooner. This is a very wise option if you can comfortably afford to do it.
Lender Paid Mortgage Insurance (LPMI) - Lender Paid Mortgage Insurance or LPMI is a way to avoid paying traditional mortgage insurance. In return for a small increase to your interest rate, the lender will pay the mortgage insurance for you.
This benefits you the borrower in several ways:
1. The payment on this type of loan is usually lower than a no PMI loan or traditional loan with Private Mortgage Insurance (PMI).
2. Generally you will be in a better tax situation due to the increase in interest paid.
Lender paid mortgage insurance should be carefully looked at before obtaining. If you plan on keeping your home for the life of the loan, you are locked into a great fixed interest rate and never have any plan of refinancing that mortgage then it may be better to pay the PMI instead of the Lender paid mortgage insurance. With the lender paid mortgage insurance you are stuck with the increase to your interest rate for the life of the loan and with the PMI you are able to drop it at either 78% or 80% (depending on your lender and their guidelines) loan to value of your home. Therefore, it could end up costing you more with the LPMI than it would with the regular PMI. However, most people sell or refinance within five years so the LPMI is a nice option for many people.
If simplicity is one of your goals, a LPMI loan might benefit you with eliminating the hassle of paying two loans. Consult with your loan consultant as to when the Mortgage Insurance can be waived.
Can I cancel my Mortgage Insurance (MI)? - Cancelling Mortgage Insurance is a very complicated issue, affected by factors such as:
When the mortgage originated?
Who eventually purchased the mortgage (Fannie Mae / Freddie Mac)?
Has the property value increased / decreased?
Have you made any late payments?
Do you have a 2nd mortgage / equity line?
If you believe your now owe less than 80% of the value of your house and you are still paying Mortgage Insurance, contact a mortgage broker immediately to help you work through this complicated issue.
A No PMI loan may also be obtained to do away with any PMI on your existing loan. Ask your mortgage professional about refinancing today!
PMI, which protects the lender if a home isn’t repaid, was required when you obtained your loan because your loan-to-value ratio (ltv) at the time was greater than 80 percent. When your loan has reached an LTV of 80 percent of less, you may be eligible to cancel your PMI, which would reduce your total monthly home loan payment and save you money.
If you currently pay private mortgage insurance premiums, you may have the right under federal law to cancel the insurance and stop paying premiums. This would reduce your total monthly payment.
You may have the right to cancel private mortgage insurance if the principal balance of your loan is 80 percent or less of the current market value of your home. Under Minnesota law, the value of your property can be determined by a professional appraisal. You need to pay for this appraisal, but in most cases you will be able to recover this cost in less than a year if your mortgage insurance is canceled.
The following notice is provided in keeping with the Homeowners Protection Act of 1998.
If your loan was for a single family home that is your principal residence, was funded on or after July 29, 1999, and you meet certain conditions, you have the right to cancel your PMI when either the principal balance of your loan is first scheduled to reach 80 percent of he original value of your home, or based on actual payments, first reached 80 percent of the original value.
If not previously cancelled, the PMI on your loan will be terminated when the principal balance of your loan is first scheduled to reach 78 percent of the original value of your home, if your loan payments are current. If your payments aren’t current on that date, the PMI will terminate when your loan payments become current.
The definition of “original value” is the lesser of the purchase price or appraised value for which your home was owned by you for less than one year; for all other loans, the original value is based on the appraised value of your home.
If your loan was funded before July 29, 1999, you may, under certain circumstances, be able to cancel the PMI on you loan with the agreement of you lender or in keeping with applicable state law.
No matter when your loan was funded, the cancellation of PMI is subject to conditions.
You must contact your lender to find out what their guidelines are exactly in regards to trying to get your mortgage insurance dropped. Different lenders have different policies on how this is handled. Your personal mortgage profesional, mortgage broker, may be able to help you find the necessary information out. Please consult him/her first to see what they can do for you.
Private Mortgage Insurance premiums are costly. The higher the Loan-to-Value ratio, the more PMI costs. PMI costs cannot be deducted for tax purposes. Although PMI has helped many homeonwers to buy homes they otherwise would not be able to get into, it should always be eliminated as soon as possible either by paying down the loan balance or, if the property has appreciated in value, by way of an appraisal.
Paying PMI initially, can actually get you a lower rate, because of the fact that there is insurance on the loan. Getting an 80/20 loan will most likely have a lower payment to start, but when PMI is removed, it is possible the 80/20 loan will have a higher blended rate.
Mortgage insurance will not be required from your lender once you have paid down the principal balance below 80% of the original sales price or appraised value. Lenders usually require you to be at 78% of the original value and the MI or PMI will automatically be dropped.
Typically the lender will allow the PMI to be released after 12 months and a new appraisal from one of their chosen appraisers if it shows sufficient equity.
You can also find lenders who do not require Private Mortgage Insurance. Many lenders also offer their financing in '2' loans . One 80 percent of the loan, and the remaining 20 as another to avoid paying Private Mortgage Insurance.
Federal law forces most lenders to automatically cancel PMI when a homeowner pays down their mortgage balance to at least 78 percent of the home's original purchase price. Home owners also may apply to have the insurance removed when the mortgage balance is paid down to 80 percent of the original value. In many cases the homeowner is required to pay for a new appraisal.