What Is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance protects the mortgage lender against losses in the event the borrower defaults on a mortgage loan. The insurance premium is paid by the borrower and is typically added to the monthly mortgage payment. Private Mortgage Insurance is generally required when the borrower is unable to make a down payment equal to, or more than 20% of the home's purchase price.

Some mortgage lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The additional interest rate increase generally ranges from 0.75 percent to 1 percent, depending on the amount of down payment applied. Typically, PMI premiums range from 0.5% to 1%. Generally it is not advisable to accept the increase in interest option for several reasons.

Private Mortgage Insurance Advantage.

PMI is an advantage to both the lender and the home buyer. It protects the mortgage company in case of loan default, but also permits a borrower to buy a home with as little as 0 to 5% down payment.

What Does Private Mortgage Cost?

Private Mortgage Insurance premiums vary depending upon the amount of the down payment. The greater the down payment, the less the premium. Typically, the monthly cost is from 0.5% to 1.0% of the loan amount. As an example: Borrower makes a 10% down payment on a $300,000 home which is $30,000. The lender multiplies the 90% loan ($270,000) times 0.005 making the annual cost $1,350. Divided by 12 months, the amount added to the mortgage payment would be $112.50. That is a stiff amount, but if you cannot make the necessary 20% down payment, it permits the loan to happen providing of course that you get approved for the loan.

Ways To Cancel, Remove Or Avoid PMI Premiums.

Generally, once reaching the point where the loan-to-value ratio hits 80 percent, you should notify the lender to discontinue the PMI premiums. The Homeowners Protection Act of 1998, requires lenders to tell the buyer at escrow closing how many years and months it will take to reach that 80 percent level assuming all payments have been paid current. Lenders must automatically cancel PMI when the remaining loan principle balance hits 78 percent of the original loan amount.

It is important to note that in some cases, lenders are permitted to require PMI down to a 50% equity for high-risk borrowers particularly when the borrower provides little proof of income and other information during the loan approval process. Also, some FHA loans require PMI premiums throughout the entire term of the mortgage loan. When applying for a mortgage, ask the lender to clarify its position on PMI based upon your particular credit rating and type of loan.

1. Pay Down Your Mortgage. By making additional principle payments, it quickens the time it takes the loan-to-value-ratio to fall below 80 percent at which point you may no longer be required to have PMI.

2. Market Value Increases. If the market value of your home increases to the point that you achieve at least a 20% equity, you might be able to terminate the Private Mortgage Insurance. A valid home appraisal is required and the cost of the appraisal is the borrower's responsibility.

3. Remodeling & Home Improvements May Increase Equity. Home improvements and remodeling will generally increase the market value of a home to some degree. However, just like in item 2 above, an appraisal is required.

4. Other Ways To Avoid PMI. There are ways to avoid the PMI requirement at the outset even if you can't satisfy the 20% down requirement such as "piggyback" loans and "80-10-10 loans" which essentially involves two loans, plus a 10% down payment. A second mortgage provides for the 10% down, therefore satisfying the 20% total requirement. Talk to you mortgage lender about these options and possibly some other options that could result in waiving the PMI. Ask your selected mortgage lender about various ways to avoid the added cost of PMI.

PMI Helps Attain The American Dream.

Although PMI increases mortgage payments, they are an advantage for many families that otherwise could not afford a sizable down payment on a home. However, take the reasonable necessary steps to try and avoid paying the extra cost. Also, track your payments and keep an eye on market value increases so you know when to request cancellation of Private Mortgage Insurance.

More Information.

HUD. The PMI Act of 1999 - Information.