Everything You Want to Know About PMI
To learn about the ins and outs of private mortgage insurance or PMI, we should first understand the basics including what private mortgage insurance is and what is its function. Private mortgage insurance is extra insurance lenders require from homebuyers whom obtain mortgages financing more than 80% of the home value or purchase price. PMI works as a type of protection for the lender because it is considered riskier to lend more than 80% of value on one single property. This insurance protects them from extensive losses if a borrower were to default on their loan.
To
help make a bit easier to sift through the different pieces of advice,
we have grouped this article into three categories including: PMI
Basics, PMI Benefits, Avoiding
PMI, and Terminating
PMI.
Private
Mortgage Insurance Basics
-
Applied to owner-occupied residential mortgages (i.e. single family homes)
-
Generally required when financing more than 80% of property value with one loan
-
It is possible to stop PMI after your mortgage balance dips below 80% of the home value
-
Lenders legally now share the responsibility with the borrower to end PMI payments
-
PMI can be removed by paying down the mortgage below 80% of property value
-
PMI can be removed through appreciating values to where the mortgage is less than 80%
Private
Mortgage Insurance Benefits
-
PMI offers predictable monthly mortgage payments without adjustable rates
-
Can be more affordable than financing more than 80% in two separate loans
-
Gives homebuyers the opportunity to buy a home without having a big down payment
-
PMI is now tax deductible for family incomes less than $100,000
Avoiding Private
Mortgage Insurance
Breaking
the mortgage up into two separate loans. With
so many individuals, couples, and families
putting less than 20% down when buying their homes, it has become
necessary for
us to come
up with some creative financing methods.
One method includes breaking the over-80%-financing mortgage
into two
separate loans.
For example,
if we are obtaining a mortgage for 100% financing
we can break the loan into a first mortgage of 80% and a second
mortgage
of 20%.
This
way you avoid the necessity of having private
mortgage insurance added to your mortgage payment every month.
This also opens
up the possiblities to more individuals and families
to own a home without
having to save a substantial down payment.
No
PMI Mortgages. Nowadays
some lenders offer more than 80% financing in one loan without
requiring PMI to be paid. Lenders literally build in the PMI
payments into your interest rate so that you do not need to
make the payments every month. As a result you will obtain
a mortgage with a higher interest rate.
Terminating
Private Mortgage Insurance
Doing
it yourself. One
of the most common methods of terminating PMI is to cancel
the extra insurance on your own. With the right paperwork
you have the right to request cancellation of your mortgage
PMI once you have reached less than or equal to 80% of your
original purchase price or current property value. In the case
that you have added a second mortgage to your home you cannot
remove PMI if the balance is or has the potential of
rising above 80% of the property value (i.e. home equity lines
of credit). Remember that 1) your payment history
must be timely, 2) some lenders
will
require
an
appraisal
before
removing
PMI, and 3) some lenders will go through an extended process
where they will analyze your appraisal, property
value, current mortgage balance, and ultimately your cancellation
eligibility. Be prepared for the removal of your PMI to take
longer than a couple days.
Lender
termination. Since
1998, lenders have been required by the Homeowner's Protection
Act to inform borrowers of their rights to cancel PMI at the
close of escrow and at least once every year. In
the
past PMI
payments had a tendency to go forgotten by borrowers after
a couple years of making monthly mortgage payments--with PMI
being built into the mortgage, it is easy to let the additional
cost slip the mind. This could cost the borrower thousands
of dollars a year. So since then, lenders have been required
to remove PMI from any mortgages that are 78% of the property's
current value. However, remember that though lenders are required
to remove PMI they still have the right to demand timely payments
before cancelling the extra insurance.
Chronological
termination. If
for any reason PMI has not been removed by the time your mortgage
is halfway through, the lender is required to cancel the extra insurance.
So for example, for traditional 30 year mortgages, once 15 years
have passed your PMI is required to be removed whether or not your
balance is above 80% of the current value. However, like all the
other cancellation methods the lender has the right to require that
your payments are current before they cancel your PMI.
If
you currently have PMI on your mortgage it is important never to forget
the potential
of saving thousands a year by cancelling the extra insurance. If you
have misplaced the information and documents given to you by the lender
regarding your right to cancel insurance, you can always request another
copy or find out more by visiting the official website of the Federal
Trade Commission.
