Private Mortgage Insurance (PMI) is often stigmatized and perceived as a bad thing when comes to buying or refinancing a home. This may be due to the misconceptions and/or general lack of understanding about what PMI is, how it works, and lack of awareness about the benefits of using PMI to finance a home.
Home buyers, home owners, and other real estate professionals deserve more accurate and more informative information about the role Private Mortgage Insurance (PMI) can play in expanding home ownership by securing a low down payment affordable home loan. ==> Get a Loan Pre-Approval and Estimate with PMI Now
Unfortunately, many loan officers themselves do not fully understand the different types of PMI programs available or know how to properly structure a loan with PMI. That may be why so many loan officers push home buyers into higher cost FHA financing.
Consider this an official consumer FAQ & Answer guide to understanding the basics and learning more about private mortgage insurance so you can determine if it’s the right option for you.
FAQ’s & Answers About Private Mortgage Insurance (PMI)
What is Private Mortgage Insurance (PMI)?
PMI Mortgage Insurance (PMI) is an affordable financial tool that enables home buyers to purchase a home with a low down payment (less than 20%) or refinance when having a loan-to-value (LTV) greater than 80%.
Mortgage insurance protects a lender from loss when a home owner cannot repay the loan and eventually leads to foreclosure or short sale.
What is ‘Private‘ About Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is different than government sponsored mortgage insurance on loans like FHA, VA, and USDA loan programs. Conventional requires mortgage insurance be provided by ‘privately owned’ mortgage insurance companies.
What are the Benefits of PMI?
- PMI gives people access to home ownership who haven’t been able to save 20% for a down payment.
- PMI allows people to qualify and buy with as little as 3% to 5% down payment and buy a home much sooner.
- Retain savings in your bank account for emergencies rather than depleting savings for a 20% down payment.
- PMI can be canceled or removed once your LTV drops below 80% in as little as just two years.
- PMI may be tax deductible.
Why Do I Need to Pay PMI Insurance?
Government Sponsored Enterprise (GSE’s) who create the mortgage qualifying and underwriting guidelines for Fannie Mae and Freddie Mac, require mortgage insurance coverage on home loans when a borrower has less than 20% down payment or when their loan loan-to-value (LTV) is over 80% (higher risk).
Risk of financial loss to a lender increases when a borrower has a lower down payment (or less equity). If a borrower runs into financial hardship and can no longer make the payment and is unable to sell the home, and then defaults, the PMI company covers any shortage or loss the lender incurs.
How Much Does PMI Cost?
PMI premiums/rates have dropped significantly over the last 6-12 months and can vary depending on about 15-20 variables. For example, lower PMI rates are available with 15% down payment 760 credit score borrower on a 30 year fixed purchase loan than on a 95% LTV cash out refinance 640 credit score with a 5/1 ARM loan on a 2nd home condo.
PMI typically costs between one half to two thirds LESS than FHA’s MIP. We work with 4-5 different PMI companies and they all pretty much have the same premium rates. In fact, you are free to view their rates and guidelines for yourself (FYI – mortgage lenders cannot mark up a PMI premium).
What is the Difference Between Private Mortgage Insurance (PMI) and FHA’s Mortgage Insurance Premium (MIP)?
There are four primary differences between PMI Conventional loans (Fannie Mae/Freddie Mac) and the Mortgage Insurance Premium on an FHA loan.
- FHA’s annual monthly mortgage insurance (MMI) is permanent for borrowers with less than 10% down payment.
- FHA’s MI is much more expensive than PMI and results in higher mortgage payments.
- PMI rates/premiums are more dependent on a borrowers credit score and LTV than FHA’s.
- PMI does not require both up front paid mortgage insurance (UFMIP) and monthly mortgage insurance (MMI) like FHA requires.
Read more about ==> FHA’s Mortgage Insurance Premium
What is the Difference Between Private Mortgage Insurance and Homeowners Hazard or Fire Insurance?
Homeowners insurance, also referred to as hazard insurance or fire insurance, protects YOU from financial loss if your home is burned to the ground, damaged (hail or flood), or any loss from theft of any valuables inside the home or on the property.
The borrower is actually responsible for choosing their own homeowners insurance company and has little to do with the actual mortgage you may have on the home.
All lenders require a home owner maintain a home owners insurance policy regardless of the down payment, amount owed, or amount of equity in the home. You should discuss the different types of homeowner’s insurance, such as hazard, flood, earthquake, wind etc… with a local insurance professional.
Is PMI the Same as Mortgage Life Insurance?
This can be confusing. PMI is not a death benefit for your heirs. It only protects the lender in case of non-payment or default. Mortgage life insurance is a fancy way to market a voluntary term life insurance policy to cover the mortgage payment in the event of your death.
Why Do Some Lenders Require PMI and Others Don’t?
All loans underwritten to Fannie Mae/Freddie Mac conventional financing guidelines with less than 20% down payment require PMI of some sort….unless you get a piggyback 2nd lien mortgage or equity line of credit.
The shady part about mortgage lenders (and people in general) is that some flat out lie and claim there isn’t any PMI on a loan in hopes of trying to make their loan offer appear more attractive.
If and when a lender lies and says your loan has no PMI, they are selling you Lender Paid PMI (LPMI – see below) to avoid a monthly payment. But, the PMI disclosures will come at some point and reveal the truth. Just because a mortgage loan doesn’t have a monthly PMI payment doesn’t mean there is not PMI on the loan.
When Can I Cancel or Remove PMI from My Loan?
There are three way to remove, cancel, or terminate PMI.
- The Homeowner’s Protection Act (HPA) of 1998 gives homeowners the right to submit a written cancellation request to remove the borrower paid PMI premium once your loan reaches 80% LTV based on the natural paying down (amortization) of the loan balance and original appraisal value or purchase price, which ever is less. Paying an extra $100/month to speed this up will not work.
- Automatic termination of the PMI will occur at 78% LTV if you are unable or forget to request PMI cancellation sooner.
- New Appraisal – You may also be able to remove the PMI with a new appraisal value after a minimum of two years to determine if the new LTV is below 80% or 78% LTV. This is at the lenders discretion to remove your PMI.
You will need a minimum 12-24 months of on time payment history to get your PMI removed or canceled regardless of which avenue you pursue to remove your PMI.
Additional resources for canceling PMI.
Yes, if your home will appraise at 80% LTV or lower, refinancing out of your current loan will allow you to secure a new loan without PMI! Even if the new interest rate is slightly higher than the current interest rate, it could make sense to refinance and remove your PMI if the current lender/servicer will not remove it.
How Can I Avoid Paying PMI?
Four ways to avoid paying private mortgage insurance:
- Bring in a 20% down payment (it can be a gift from a family member)
- Obtain a second mortgage or a ‘Piggyback’ loan (yes, they still exist)
- Have your lender pay the PMI with a lender rebate or credit to avoid monthly payments.
- Have the seller pay the PMI
Are there Different Types of Private Mortgage Insurance?
Yes, but it gets confusing and honestly, there just isn’t enough room here to write another 2,000 words to explain it all. Below is how PMI is categorized.
- Lender Paid Mortgage Insurance (LPMI): This is where the lender uses rebate (yield spread) available by accepting a higher interest rate to pay the private mortgage insurance premium. It is paid one time up front called Single Paid LPMI, but can also be structured to be paid monthly by the lender.
- Borrower Paid Mortgage Insurance (BPMI): Single Paid BPMI is when the borrower pays a one time PMI premium out of pocket at escrow. This can also be included into the actual loan balance in some situations. The most common and traditional option is Borrower Paid Monthly Insurance where the borrower pays a premium each month.
- Split Premium PMI: Split premium PMI is a hybrid, similar to how FHA charges part of the premium up front and the other part monthly. This option is much less than FHA’s MIP.
One is not necessarily better than the other. Which one is best for you can depend on many variables, such as your FICO credit score, LTV, time you plan to stay in the home, monthly payment you are comfortable paying, and other variables. Fannie Mae has a very good PMI matrix if you want to learn more here.
Additional Questions? Take Action Now.
If you have additional questions about PMI Insurance when buying or refinancing, or just want to compare the many PMI options with FHA financing, please contact me or call direct (951) 215-6119.