What is PMI?
PMI (Private Mortgage Insurance) is insurance that protects the lender from a loan default. PMI is required when a homebuyer does not have a down payment that is at least 20% of the home’s purchase price. While the homebuyer is the purchaser of PMI (Private Mortgage Insurance), the beneficiary of PMI is the lender (or the purchaser of the loan if it is sold in secondary markets). Depending on several factors, PMI may or may not be tax deductible.
PMI is usually between .5% and 1% of the total loan amount. For example, if a home is selling for $100,000 and the homebuyer obtains an FHA Loan for 3.5% down, this means that the homebuyer would have to purchase PMI for the actual loan of $96,500 (which is included in the monthly payments).
Below is an example of a PMI calculation. The following assumptions have been made:
- 30 Year Mortgage
- 6% Fixed Interest Rate
|Total Amount of the Loan||$96,500.00|
|Monthly Principle and Interest||$479.64|
|Monthly PMI Low Range (.5%)||$40.21|
|Monthly PMI High Range (1%)||$80.42|
|Annual Principle and Interest||$5,755.68|
|Annual PMI Low Range (.5%)||$482.50|
|Annual PMI High Range (1%)||$965.00|
As seen above, the cost of PMI on a $96,500 loan will range from $482.50 to $965.00 a year (or $40.21 to $80.42 a month).
How to Get Rid of PMI?
The Homeowner’s Protection Act of 1998 (HPA) addresses the termination of PMI. Under the HPA, the homeowner has the right to request that the PMI be canceled when he or she pays down the mortgage to the point that the mortgage equals 80 percent of the original purchase price or the appraised value of the home at the time the loan was obtained (whichever is less).
A homeowner can only get rid of the PMI if he or she has established a good payment history (not 30 days late with a mortgage payment within the year that the request is made, or a mortgage payment has not been 60 days late within the last two years). A couple of other things to keep in mind when canceling PMI:
- The lender may require proof that the home has not decreased in value since the date of purchase
- The lender will not allow PMI to be removed if there is evidence of a second mortgage
Mortgage lenders must automatically cancel the homeowner’s PMI coverage once the mortgage is paid down to 78 percent of the value (the loan must be in good standing). Under the HPA, lenders must to terminate the PMI coverage within 30 days of the cancellation or the automatic termination date. The lender must also return any and all unearned premiums to the homeowner within 45 days of the cancellation or termination date.
Another way (albeit much longer) to get rid of PMI is at the midpoint of the amortization period. This may occur with a longer term ARM or negatively amortized loan. At the midpoint of the amortization period, the lender must terminate the PMI. For example, a 30-year loan with 360 total payments, the midpoint of the amortization would occur after 180 payments. Similar to the automatic PMI termination/homeowner cancelation, it is required that the borrower be current on all payments. This method of terminating PMI must occur within 30 days of midpoint of the amortization period.
Ways to Avoid PMI
Rarely, the lender/mortgage broker will offer some offer some options to avoid paying PMI; however, these will most likely not be viable options. Below are several ways to avoid paying PMI, as it is an insurance policy that provides nothing to the homeowner (other than having the ability to get the mortgage with <20% down):
- Save until you are able to make a 20% down payment
- Buy a house that is cheaper than the one that requires PMI. This way you will be able to make a 20% down payment.
- Order a home appraisal (for homeowner’s currently paying PMI), in order to show the lender that you have over 20% of equity in your home
- Refinance (for homeowner’s currently paying PMI)
- Rent instead of buying a home
My advice is to avoid paying PMI at all costs, even if it means that you will have to delay the purchase of a home.
Another informative article from google Real Estate.