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PMI

Filed Under mortgage 

Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

In many cases, the borrower can avoid paying private mortgage insurance by having two loans, a first and a second. The interest on the second mortgage, though at a higher rate than the first mortgage, is tax deductible, while PMI is not.

Statistics have shown that homeowners with more than 20% equity invested in the property are less likely to default on the loan in a soft real estate market. Banks bear a higher risk when granting a loan of more than 80% of the value of the property. Therefore, Private Mortgage Insurance is almost always required by banks. Although the homebuyer often pays for the PMI premium, some banks offer loan programs where the banks pay for the premium.

PMI adds to the monthly expenses of a homeowner and can be very expensive depending on the loan-to-value ratio. While there are other methods to structure a mortgage so that PMI can be avoided. PMI nonetheless is a very useful and effective tool in helping homebuyers with little or no down payment to purchase a home. When choosing a low or no down payment mortgage, besides borrower-paid PMI, lender-paid PMI, or piggyback loans, a homebuyer should also consider other factors that are unique to his situation, such as the loan to value ratio, the number of years he intends to live in the property, the historic and expected rate of appreciation in the area where the property is located, and the current and expected future interest rate climate. All of these, amongst others, should play a role in deciding on the best mortgage loan, with or without PMI.

MIP stands for “mortgage insurance premium” and is required on FHA loans. PMI, or “private mortgage insurance,” is used with conventional loans. Sometimes homeowners mistakenly confuse MIP or PMI with additional mortgage insurance which some lenders offer. That additional insurance pays off the loan for you if you die or become disabled - MIP and PMI do not provide any such benefits for the homeowner.

PMI in some cases may be more beneficial than a piggyback loan have your lender review your situation both ways before making a final decision.

Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premiums.

PMI premium is a monthly recurring expense for the homeowner (unless the mortgage is a lender paid PMI mortgage). The premium is calculated base on the loan to value ratio (loan amount divided by property value). The higher the loan to value over 80%, the higher the monthly Private Mortgage Insurance premium. After a homeowner takes a mortgage loan with a PMI feature, there are three ways to eliminate the banks requirement of buying PMI. The obvious is to refinance into a mortgage without a PMI feature. The second way is to pay down the mortgage balance to below 75%, but this can take years to accomplish. For example, a homeowner of a $300,000 property with a $270,000 (90% loan to value) 30-year mortgage at 6% interest rate will not be required to carry PMI when the loan balance is paid down to $225,000 (75%), but it would take about 10 years to pay down to pay a 90% loan to value ratio to 75%.The third is to hire a licensed appraiser to appraise the property. If the new appraised value has appreciated enough to make the loan balance below 80%, the homeowner is no long required to purchase PMI on the loan. Take the example of the above homeowner of the $300,000 property with the $270,000 mortgage, if one year later a new appraisal shows the property has appreciated enough to support a value of $333,360, with the loan balance a year later of $266,684 and a loan-to-value ratio of below 80% ($266,684 divided by $333,360 = 79.9%) the homeowner will no longer be required to maintain PMI.

For homeowners who already committed to mortgage loans with PMI feature, the aforementioned are the only ways to eliminate buying PMI. For home buyers who are in the process of shopping for mortgages, in a low interest rate environment, a piggyback is often used to get a homebuyer with less than 20% down payment into a house. In a high interest environment, paying the monthly PMI premium may make more economic sense than paying the high interest second mortgage in a piggyback loan structure.

PMI, or Private Mortgage Insurance, is typically provided by a private company and paid for by the borrower; PMI is intended to protect the lender against loss if the borrower defaults on the loan. PMI is only required for some mortgage loans.

The most common 2 loan scenario is the 80/20 combo. That would equate to a first loan of 80% and a second loan of 20% of the purchase price. If you have the right mortgage professional working for you they will do the math on both a 100% one loan and the 80/20 combo and let you make the decision that makes better sense for you.

Your Home Value Has Increased? When making mortgage payments, most of the payments during the first few years are finance charges. Therefore, it can take 10 to 15 years to pay down a loan to reach 80 percent of the loan value. If the home prices in your area are rising quickly, your property value may increase so that you can reach the 80 percent mark a lot faster. Your property value could also increase due to home improvements that you make to your home. When your home value has increased, you may be able to cancel PMI on your mortgage. Although the new law does not require a mortgage servicer to consider the current property value, you should contact them to see if they are willing to do so. Also, be sure to ask what documentation may be required to demonstrate the higher property value. Be prepared to pay for a new appraisal.

Is your rate too high? If you're looking to compare mortgage rates or to get a rate quote on a FHA loan start here


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