What is Private Mortgage insurance (PMI)? PMI or Private Mortgage Insurance is normally required when you buy a house with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage-insurance companies. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you might not be able to buy a home without a 20% down payment. The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally
added to your monthly mortgage payment. The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance
policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of
the original property value. Some lenders may require that you pay PMI for one or two years before you may apply to remove it. To cancel the PMI on your loan, contact your lender. In most cases, an appraisal will be required to
determine the value of your property. You will probably also be required to pay for the cost of this appraisal. Another way of canceling the PMI on your loan is to refinance and to get a new loan without PMI. Example Most homebuyers
need PMI because 20 percent of the sale price on a home is a lot of money; for instance, that's $20,000 on a $100,000 home. Homebuyers must maintain the PMI premiums until they cross that one-fifth-of-principal threshold, a process
that can take years in longer-term mortgages. Tip Note: The law does allow lenders to continue
requiring PMI all the way down to 50 percent equity for so-called high-risk borrowers. Traditionally, those loans that are considered riskier include reduced documentation loans, in which customers provide less proof of income and
other information during the approval process. Loans for people with spotty credit histories and higher debt-to-income ratios also fall into this category. Additionally, some FHA loans require payment of PMI throughout the entire
life of the loan. Ways to avoid PMI Pay more interest: Some lenders will waive the
mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increases generally range from .75 percent to 1 percent, depending on the down payment. The advantage is that mortgage
interest is tax deductible. Using an "80-15-5" or an "80-10-10" loan:
This program involves two loans and either a 5 percent or a 10 percent down payment. The 95 percent loan is financed with a first mortgage equal to 80 percent of the sale price, and a second mortgage for the remaining 15 percent of the sale price. The second mortgage has a higher interest rate but since it applies to only 15 percent of the total loan, the monthly payments on the two mortgages are still lower than paying one mortgage with mortgage insurance. Plus, again, there is the advantage of mortgage interest being tax deductible.
Example: If we compare the purchase of a $100,000 home under the "80-10-10" plan with a standard fixed mortgage including PMI, we find that the former is $17.45 cheaper each month. Here's how it works. Under
the "80-10-10" plan, the 10 percent down payment on a $100,000 house is $10,000. The first mortgage is $80,000 at 7.50 percent, which comes to a monthly payment of $559. The second mortgage for $10,000 has a 9.50 percent
interest rate, making a monthly payment of $84. Total monthly payments of the two loans: $643. With a $10,000 down payment, one mortgage of $90,000 at 7.50 percent has a monthly payment of $629, plus PMI of $31.45, making a total
payment of
To view a rate card from MGIC... one of the largest PMI companies, click here and reference the Monthly Premium section. That is the most common way to setup your mortgage insurance.
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