What is PMI Insurance?
Private mortgage insurance (PMI) is a term many homeowners have heard but few understand. Unfortunately, even more homeowners have paid PMI premiums long after it was needed because they didn't know they could cancel.
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Here are answers to questions I am most frequently asked about PMI:
What is Private Mortgage Insurance (PMI)?
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As its name states, PMI is insurance. Like all insurance, it protects someone against the loss of something. For example, car insurance protects the car owner against the loss of his car. In this case, PMI protects lenders against the loss of their money if borrowers fail to repay their mortgage.
If you buy a house and make a down payment of less than 20 percent, lenders require that you pay for PMI insurance. Let’s use an example of Jane buying a home for the purchase price of $800,000. She has $80,000 for a down payment, which is 10 percent of the purchase price. That means she has to pay for PMI because she is putting less than 20 percent down as a down payment.
What’s the cost of PMI?
PMI premiums vary depending on the type of mortgage insurance chosen. Generally, they range from .5 to 1 percent of the amount of your home loan. Borrower-paid mortgage insurance premiums can be remitted to the mortgage insurance provider monthly, annually or as a one-time single premium payment depending on which option the borrower selects. Lender paid mortgage insurance premiums can be remitted to the MI provider by the loan servicer on either a monthly basis or as a one-time single premium. As with any insurance, you should explore the Mortgage Insurance options to find which you feel comfortable.
Do all loans require PMI?
No, if you put down 20 percent or more of the purchase price of your home, you are not required to buy PMI.
I've made mortgage payments for two years why do I still need PMI?
Understanding how your loan works is very important. The first several years of your mortgage payments go toward paying down the finance charges (interest) on your home loan. PMI is based on the principal (the amount you actually borrowed), not including finance charges. Because of this, it can take many years to reach the point where you’ve paid off 20 percent of the price of your home.
How do I know when I can stop paying for PMI?
The Homeowners Protection Act (HPA) requires lenders to inform a buyer at closing that PMI can be cancelled and at what point in the loan this will occur. However, it is still your responsibility as the homeowner to request cancellation once you qualify. In other words, no one is going to automatically cancel your PMI when you’ve paid off 20 percent of the price of your home. You must do that or you will continue to pay.
What if I forget to ask to have my PMI cancelled?
If you do not ask for PMI to be cancelled, you’ll continue to pay PMI until you’ve paid off 22 percent of the price of your home. Fortunately, the lender is required to automatically cancel PMI once you’ve reached the 78/22 point, which means you’ve paid off 22 percent and only owe 78 percent of the price of your home. However, if your loan isn’t current or has more than one late payment in the past year, you still must pay for PMI.
What if I have had late mortgage payments in the past?
As long as you have had no more than two late payments in the past two years, the lender will allow you to cancel.
What if I have had more than two late mortgage payments?
The lender will require you to maintain PMI until your home loan reaches 77/23, at the earliest. In some cases, the lender can require you to maintain PMI up to the halfway point in your home loan, at which time they are required by HPA to cancel.
Will I ever have to get PMI again for my home loan?
No. Once PMI has reached the cancellation point and has been cancelled, the lender can't require you to purchase additional PMI. The only way that can change is if you refinance your current home loan.
Liz Boucher is the Branch Manager of the Coldwell Banker Larchmont office which specializes in both residential and commercial real estate. Liz has been in real estate sales since 1998. She is an associate broker and has been managing the Coldwell Banker office since 2006. You can contact her at 914-834-7100 or at liz.boucher@cbmoves.com
