Private Mortgage Insurance (PMI)

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to 1-years' worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment or ask about other loan program options.

PMI companies write insurance policies to protect approximately the top 20% of the mortgage against default. This depends on the lender's and investor's requirements, the loan-to-value ratio, and the type of loan program involved. Should a default occur, the lender will sell the property to liquidate the debt and is reimbursed by the PMI company for any remaining amount up to the policy value.

PMI costs vary from insurer to insurer, and from plan to plan. Example: A highly leveraged adjustable-rate mortgage requires the borrower to pay a higher premium to get coverage. Buyers with a 5% down payment can expect to pay a premium of approximately 0.78% times the annual loan amount, $92.67 monthly for a $150,000 purchase price. But the PMI premium would drop to 0.52% times the annual amount, $58.50 monthly if a 10% down payment was made.

PMI fees can be paid in many ways depending on the company used:

• Borrowers can choose to pay the 1-years premium at closing, and then an annual renewal premium is collected monthly as part of the house payment.
• Borrowers can choose to pay no premium at closing but add on a slightly higher premium monthly to the principal, interest, tax, and insurance payment.
• Borrowers who want to sidestep paying PMI at closing but don't want to increase their monthly house payment can finance a lump-sum PMI premium into their loan. 

Typically, the buyer covers the cost of PMI, but the lender is the PMI company's client and shops for insurance on behalf of the borrower. Lenders usually deal with only a few PMI companies because they know the guidelines for those insurers. This can be a problem when one of the lender's prime companies turns down a loan because the borrower doesn't fit its risk parameters. A lender might follow suit and deny the loan application without consulting a second PMI company which could leave all parties in an undesirable position. The lender has the difficult task of being fair to the borrower while shopping for the most effective way to lessen liability.

The Private Mortgage Insurance industry originated in the 1950's with the first large carrier, Mortgage Guaranty Insurance Corporation (MGIC). They were referred to as "magic" as these early PMI methods were deemed to "magically" assist in getting lender approval on otherwise unacceptable loan packages. Today there are 8 PMI underwriting companies in the United States.

The Homeowners Protection Act of 1998 established rules for automatic termination and borrower cancellation of Private Mortgage Insurance (PMI) for home mortgages. These protections apply to certain home mortgages signed on or after July 29, 1999, for the home purchase, initial construction, or refinance of a single-family home.

With certain exceptions (home mortgages signed on or after July 29, 1999) your PMI must be terminated automatically when 22% of the equity of your home is reached, based on the original property value and if your mortgage payments are current. It does not apply to government-insured FHA or VA loans, or to loans with lender-paid PMI.

You can request to have the PMI canceled once you exceed 20% home equity either based on original sale price or current appraised value. There are several conditions and cost associated with this process. It is not automatic. Federal law does not require your lender or mortgage servicer to cancel PMI. Ask your lender or mortgage servicer for information about these requirements and costs.