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Private Mortgage Insurance
What is Private Mortgage Insurance
Private mortgage insurance (PMI) is a policy that
protects lenders who make loans to individuals who want to buy or
refinance a home, but are unable to come up with the required 20%
down payment.
Private Mortgage Insurance Facts:
PMI plays a valuable role in expanding home ownership.
With PMI, families can purchase homes with as
little as 3-to-5 percent down payment on a home.
Nearly 1 million people a year buy or refinance a
home with PMI.
PMI cost home owners between $20 to $100 per month.
PMI can be canceled, under certain conditions, when
a good payment history is met and 20% or more equity is achieved on
the cost of the home.
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The basics of private mortgage insurance (PMI)
By Bankrate.com
If your down payment on a home is less than
20 percent of the appraised value or sale price, you must obtain
private mortgage insurance, known as PMI, with your lender. This
will enable you to obtain a mortgage with a lower down payment because
your lender is now protected against any default on the loan.
PMI charges vary depending on the size of the
down payment and the loan, but they typically amount to about one-half
of 1 percent of the loan, according to the Mortgage Bankers Association
of America. Mortgage insurance premiums are not tax deductible.
Example
Let's say you put down 10 percent or $10,000 on a $100,000 house.
The lender multiplies the 90 percent loan, or $90,000, by .005.
The result is an annual PMI of $450, which is divided into monthly
payments of $37.50.
Most home buyers need PMI because 20 percent
of the sale price on a home is a lot of money; for instance, that's
$20,000 on a $100,000 home. Homebuyers must maintain the PMI premiums
until they cross that one-fifth-of-principal threshold, a process
that can take years in longer-term mortgages.
Tip
Keep track of your payments on the principal of the mortgage.
When you reach the point where the loan-to-value ratio hits 80 percent,
notify the lender that it is time to discontinue the PMI premiums.
The Homeowners Protection Act of 1998, which took effect in 1999,
requires lenders to tell the buyer at closing how many years and
months it will take for them to reach that 80 percent level and
cancel PMI. Lenders must automatically cancel PMI when the balance
hits 78 percent.
Note: The law does allow lenders to continue
requiring PMI all the way down to 50 percent equity for so-called
high-risk borrowers. Traditionally, those loans that are considered
riskier include reduced documentation loans, in which customers
provide less proof of income and other information during the approval
process. Loans for people with spotty credit histories and higher
debt-to-income ratios also fall into this category. Additionally,
some FHA loans require payment of PMI throughout the entire life
of the loan.
Story continues below
Ways to avoid
PMI
In today's market, there are some new ways to avoid mortgage
insurance even when you don't have the standard 20 percent down
payment.
Pay more interest: Some
lenders will waive the mortgage insurance requirement if the buyer
accepts a higher interest rate on the mortgage loan. The rate increases
generally range from .75 percent to 1 percent, depending on the
down payment. The advantage is that mortgage interest is tax deductible.
Using an "80-10-10"
loan: This program involves two loans and a 10 percent
down payment. The 90 percent loan is financed with a first mortgage
equal to 80 percent of the sale price, and a second mortgage for
the remaining 10 percent of the sale price. The second mortgage
has a higher interest rate but since it applies to only 10 percent
of the total loan, the monthly payments on the two mortgages are
still lower than paying one mortgage with mortgage insurance. Plus,
again, there is the advantage of mortgage interest being tax deductible.
Ready
to find a mortgage? Check
rates in your area.
Example: If
we compare the purchase of a $100,000 home under the "80-10-10"
plan with a standard fixed mortgage including PMI, we find that
the former is $17.45 cheaper each month.
Here's how it works. Under the "80-10-10" plan,
the 10 percent down payment on a $100,000 house is $10,000. The
first mortgage is $80,000 at 7.50 percent, which comes to a monthly
payment of $559. The second mortgage for $10,000 has a 9.50 percent
interest rate, making a monthly payment of $84. Total monthly payments
of the two loans: $643.
With a $10,000 down payment, one mortgage of
$90,000 at 7.50 percent has a monthly payment of $629, plus PMI
of $31.45, making a total payment of $660.45.
-- Updated: June 1, 2001
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Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI)
Law Requires Lenders to Cancel PMI
If you are a homeowner, you will want to be aware of a law that establishes rights
for homeowners and rules for lenders regarding private mortgage insurance (PMI)
cancellation. With this knowledge, you may eliminate premiums you may be paying
unnecessarily.
What is PMI?
Benefits of PMI
New PMI Requirements
The Homeowner's Protection Act (HPA) of 1998
How Do You Cancel or Terminate PMI?
What Disclosures Does the HPA Require?
What If Your Home Value Has Increased?
For More Information
What Is PMI?
PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home's value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.
Benefits of PMI
PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.
New PMI Requirements
A new federal law, The Homeowner's Protection Act (HPA) of 1998, requires lenders or servicers to provide certain disclosures concerning PMI for loans secured by the consumer's primary residence obtained on or after July 29, 1999. The HPA also contains disclosure provisions for mortgage loans that closed before July 29, 1999. In addition, the HPA includes provisions for
borrower-requested cancellation and automatic termination of PMI.
Why a Change in PMI Requirements?
In the past, most lenders honored consumers' requests to drop PMI coverage if their loan balance was paid down to 80 percent of the property value and they had a good payment history. However, consumers were responsible for requesting cancellation and
many consumers were not aware of this possibility. Consumers had to keep track of their loan balance to know if they had enough equity and they had to request that the lender discontinue requiring PMI coverage. In many cases, people failed to make this
request even after they became eligible, and they paid unnecessary premiums ranging from $250 to $1,200 per year for several years. With the new law, both consumers and lenders share responsibility for how long PMI coverage is required.
The Homeowner's Protection Act (HPA) of 1998
What Loans Are Covered?
Generally, the HPA applies to residential mortgage transactions obtained on or after July 29, 1999, but it also has requirements for loans obtained before that date. This new law does not cover VA and FHA government-guaranteed loans. In addition, the new law has different requirements for loans classified as "high-risk." Although the HPA does not provide the standards for what constitutes a "high risk" loan, it permits Fannie Mae and Freddie Mac to issue guidance for mortgages that conform to secondary market loan limits. Fannie Mae and Freddie Mac are corporations chartered by Congress to create a continuous flow of funds to
mortgage lenders in support of homeownership. As of January 1, 2000, mortgages in amounts of $252,700 or less are considered conforming loans. For non-conforming mortgages, the lender may designate mortgage loans as "high risk."
What Is a Residential Mortgage Transaction?
There are four requirements for a transaction to be considered a residential mortgage transaction: (1) a mortgage or deed of trust must be created or retained; (2) the property securing the loan must be a single-family dwelling; (3) the single-family dwelling must
be the primary residence of the borrower; and (4) the purpose of the transaction must be to finance the acquisition, initial construction, or refinancing of that dwelling.
How Do You Cancel or Terminate PMI?
Cancellation
Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.
Automatic Termination
Under HPA, mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage
within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date.
For high risk loans, mortgage lenders or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77 percent of the original value of the property, provided you are current on your loan.
Final Termination
Under HPA, if PMI has not been canceled or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year loan with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage. Final termination must occur within 30 days of this date.
What Disclosures Does the HPA Require?
For Loans Obtained on or after July 29, 1999
The HPA establishes three different times when a lender or servicer must notify a consumer of his or her rights. Those times are at loan closing, annually, and upon cancellation or termination of PMI.
The content of these disclosures varies depending on whether: (1) PMI is "borrower-paid PMI" or "lender-paid PMI," (2) the loan is classified as a "fixed rate mortgage" or "adjustable rate mortgage," or (3) the loan is designated as "high risk" or not.
At loan closing, lenders are required to disclose all of the following to borrowers:
The right to request cancellation of PMI and the date on which this request may be made.
The requirement that PMI be automatically terminated and the date on which this will occur.
Any exemptions to the right to cancellation or automatic termination.
A written initial amortization schedule (fixed-rate loans only).
Annually, your mortgage loan servicer must send borrowers a written statement that discloses:
The right to cancel or terminate PMI.
An address and telephone number to contact the loan servicer to determine when PMI may be canceled.
When the PMI coverage is canceled or terminated, a notification must be sent to the consumer stating that:
PMI has been terminated, and the borrower no longer has PMI coverage.
No further PMI premiums are due.
The obligation for providing notice of cancellation or termination is with the servicer of the mortgage.
For Loans Obtained before July 29, 1999
An annual statement must be sent to consumers whose mortgages were obtained before July 29, 1999. This statement should explain that under certain circumstances PMI may be canceled (such as with consent of the mortgagee). It should also provide an address and telephone
number to contact the loan servicer to determine whether PMI may be canceled.
The HPA's cancellation and automatic termination rules do not apply to loans made before July 29, 1999.
Although parts of the new law apply only to loans obtained on or after July 29, 1999, many lenders report that they plan to follow the HPA's requirements for both new and existing
loans. Making a call to your mortgage loan servicer will help you understand exactly how the law applies to you and your mortgage.
What If 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.
If you think 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.
To get a better
idea of where you stand with your mortgage, try the following
formula:
Line 1 -
Enter the present value of your mortgage:
$
Multiply
Line 1 by 1.25
x
1.25
Line 2 - This
represents the minimum value of your property
required to cancel PMI:
$
Line 3 -
Enter the purchase price of your property or a current
appraisal that is acceptable to the lender or holder
of the mortgage on your property (whichever is larger):
$
If the value
of line 2 is larger than line 3, your lender will
probably continue to require PMI.
If the value of line 2 is less than line 3, you may
be able to cancel PMI.
For More Information
To learn about your specific PMI cancellation policies, call your lender or mortgage servicing firm.
To find more information about mortgage insurance and to use a specific formula to estimate when PMI may be canceled, visit the web site of the Mortgage Insurance Companies of America.
When investigating potential frauds, you should contact several of the following:
Mortgage Insurance Companies of America
727 15th St, NW, FL 12
Washington, DC 20005-2168
202-393-5566
The U.S. Department of Housing and Urban Development Customer Service Department can answer your questions about PMI and low down-payment loans.
U.S. Dept. of Housing & Urban Development
Attn: Customer Service
451 7th Street, SW
Washington, DC 20410
(800) 767-7468
Information provided by the Federal Reserve Bank of San Francisco.
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Usually mortgage insurance is required any time you apply for a
loan with less than 20% down. Our Advantage 90 eliminates mortgage insurance by covering
it in your interest rate. Although your initial interest rate might be slightly higher,
interest is usually tax-deductible (unlike mortgage insurance premiums).
Advantage 90 gives you two ways to lower your interest rate:
Your regularly scheduled payments build equity reducing your principle to
80% of the home value we used to generate your loan. As your home appreciates, your principal becomes 75% or less of
the estimated current market value.
Advantages
10% down means more cash in your pocket
No monthly mortgage insurance premium; it's covered in your overall interest rate
A variety of fixed and adjustable rate loan options to choose from
Additionally, On Our Advantage 90 Adjustable Rate Mortgage (ARM) Programs:
100% of your down payment can come from a family member's gift for qualified borrowers.
No impound/escrow accounts for property taxes and hazard insurance required.
Your loan may be assumable if you sell your home.
Consider No Mortgage Insurance If:
You're willing to take on a slightly higher interest rate possibly to save money on taxes, with the potential to lower that rate in the future.
You want more cash on-hand.
You want an opportunity for the interest rate to be reduced in the future when your loan balance decreases, your home's value increases, or a combination of both
Available With:
Option ARMs Fixed Rate Mortgages
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The amount of monthly mortgage insurance you'll need to pay, if any, is determined by the amount of your down payment relative to the purchase price. Complete the information below, and we will compare four different down payment options to show you how much mortgage insurance will cost under each scenario.
Find our about Advantage 90 , which can eliminate mortgage insurance on any loan with a down payment 10% or more.
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When using the calculators, please keep in mind that the results of any loan calculator computations are not intended to be and should not be considered a decision of, or a commitment to, the loan type or amount for which you may qualify.
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Real Estate News and Advice
February 27, 2002
Avoid Paying Private Mortgage Insurance
by Henry Savage
Question: I will soon be in the market to buy my first home and had a meeting with my real estate agent. She ran some numbers based on a purchase price of $230,000 with down payments of five and ten percent. Since I don't have enough money for a 20 percent down payment, she says I have to pay Private Mortgage Insurance. This jacks up my payment considerably. Surely there's a way to get rid of this. Any suggestions would be helpful.
Answer: Nobody pays private mortgage insurance, or PMI, anymore. Thanks to fierce competition in the mortgage industry, there are ways to avoid PMI even with only five percent down.
First let me explain PMI. One of the most important factors in determining whether a loan application gets approved is the amount of loan in relation to the value of the property. Lenders like a big down payment because the house acts as collateral for the loan. A large down payment means that the collateral securing the loan is worth much more than the loan amount itself.
If the first trust loan exceeds 80 percent of the purchase price, lenders get nervous and will charge PMI. PMI is a monthly premium that's attached to the monthly payment. An outside insurance company actually insures a percentage of equity in the home for the lender. This reduces the lender's exposure to the same level as if the borrower put down 20 or 25 percent. The problem with PMI is that the borrower pays for it every month and the lender receives the benefit. It does nothing for the homeowner. PMI premiums aren't even tax deductible.
The best way to avoid PMI is to break up your loan amount into two separate loans. Known as an "80-10-10" or "80-15-5", this means that you would obtain an 80 percent first trust and a ten or 15 percent second trust. You would then put down either ten or five percent in cash. Since the first trust is limited to 80 percent, PMI is not charged.
Let's use your example to illustrate why a "piggy-back" loan structure is favorable. With a ten percent down payment, you would obtain a first trust of $184,000 and a 2nd trust of $23,000. A 30 year fixed rate loan for $184,000 might cost 6.75 percent, resulting in a principal and interest (P&I) payment of $1,187. The rate on the 2nd trust will be a little higher - perhaps eight percent. The P&I payment on a $23,000 loan at eight percent is $168 per month. Both of these payments together total $1,355.
Now let's compare this to one loan with PMI. A 90 percent loan in the amount of $207,000 will cost $1,335 per month. Because the 1st trust exceeds 80 percent the bank will charge somewhere around $90 as a PMI premium. The total payment with PMI is $1,425 - $70 more that the "80-10-10" piggyback option.
After taking into consideration that PMI isn't tax deductible but the extra interest that you pay on the 2nd trust is, the difference becomes more apparent.
You can follow the same logic if you only put five percent down. The interest rate on the 2nd trust might be a bit higher, but the PMI premium on a 95 percent loan increases as well.
So there you have it. Get PMI out of your mind. Consult with a good loan officer and ask about these combo loans in order to make PMI go away.
Related Articles:
Multi-Layered Loans Offer PMI Alternative
Why Wait To Cancel PMI?
PMI Uncloaked: How It Really Works
What Is PMI?
Henry Savage , the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.
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