Private Mortgage Insurance, aka PMI
What You Need to Know About Private Mortgage Insurance, and Mortgage Insurance
Premium.
PMI (short for private mortgage insurance) lets you buy a house with a conventional loan putting
less than 20 percent down -- in exchange for higher payments.
Private mortgage insurance is just what the name implies: insurance that covers the lender in case
the home buyer defaults. If you put less than 20 percent down on most mortgages, chances are
your lender will require you to have private mortgage insurance, commonly known as PMI. There is
no upfront fee for PMI.
For government loans there is no PMI; however, there is MIP (short for mortgage insurance
premium). MIP serves the same purpose than PMI; however, with MIP you have up front fees: 2.25%
added to the loan for FHA and 2.2% for VA. So with FHA, your loan amount putting a 3.5% down
payment instead of being 96.5% you would have a 98.75% of the purchase price loan amount. For
VA financing 100%, the loan amount would be 102.2% of the purchase price.
Paying PMI or MIP
The payment method is to include private mortgage insurance as part of your monthly mortgage
payment. PMI generally costs about 0.32% of the loan amount divided by 12 with 85% financing;
0.52% at 90% financing; 0.78% at 95% financing and 1% for 100% financing. There is no upfront
fee.
MIP is a bit different. About 1.15% of the loan amount divided by 12 for FHA. So the MIP monthly fee
for a $100,000.00 loan is $1,150.00/yr that is divided in 12 payments of $95.83 This is included in
your monthly payment. There is no MIP monthly fee for VA loans
You can cancel PMI
You don’t have to pay PMI forever. You can ask to have it canceled after you have built up 20
percent equity in your home. This means if your home is worth $200,000, you have at least $40,000
in equity in your home. And you don’t have to pay down your mortgage to build equity, either. If you
have made significant home improvements or your property has appreciated significantly in value,
you may be able to cancel private mortgage insurance even earlier. The lender may require you to
pay for an appraiser to establish your home’s value in today’s market.
If you signed your mortgage on or after July 29, 1999, a federal law requires lenders to
automatically – with a few exceptions – cancel your private mortgage insurance once you have paid
22 percent of the principal based on the original loan amount.
Lenders do have some leeway to refuse to cancel your PMI: if you are not current on your
payments, if there are liens against the property or if you have an exceptional amount of debt based
on your income.
Prior to the housing market crash, some people avoided private mortgage insurance by getting a
small home equity loan to “piggyback” on the mortgage. The piggyback loan pays for the rest of the
down payment so the buyer is able to put 20 percent down. These loans carry a higher interest rate
than the mortgage, but the interest may be tax-deductible. A financial advisor can help you figure
out how to determine if private mortgage insurance is the best way for you to buy a home
How To Cancel Mortgage Insurance Premium.
In the past, FHA borrowers have had to pay annual mortgage insurance premiums throughout the
entire life of their mortgages! If your loan closed before January 1, 2001, you are out of luck!The
only way to remove the mortgage insurance is to pay off the
loan or refinance the mortgage. Sorry, they say "no exceptions!"
Effective for all loans closed on or after January 1, 2001, FHA's annual mortgage insurance
premiums will be automatically canceled under the following conditions:
1. For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be
canceled when the loan to value ratio reaches 78%, provided the mortgagor has paid the annual
mortgage insurance premiums for at least five years.
2. For mortgages with terms 15 years and less and with loan to value ratios 90 percent and greater,
the annual mortgage insurance premiums will be canceled when the loan to value ratio reaches 78
percent, irrespective of the length of time the mortgagor has paid the annual mortgage premiums.
3. Mortgages with terms 15 years and less and with loan to value ratios of 89.99% and less will not
be charged annual mortgage insurance premiums.
Although the annual mortgage insurance premiums will be canceled as described, the contract of
insurance will remain in force for the loan's full term.
FHA will determine when a borrower has reached the 78% loan to value ratio based on the lower of
the sales price or appraised value at origination. New appraised values will not be considered. For
example, if the lower of the sales price or the appraised value at origination was $100,000, when the
loan amount reaches $78,000, FHA will no longer collect annual
mortgage insurance premiums on the loan. Cancellation of the annual mortgage insurance
premiums will normally be based on the scheduled amortization of the loan.
In cases where the borrower has made additional principal payments may request cancellation of
his/her mortgage insurance if the loan to value ratio has reached 78%, has paid mortgage
insurance for at least 5 years and has not been delinquent for more than 30 days at anytime within
the prior 12 months. As always, other conditions may apply.
What You Need to Know About Private Mortgage Insurance, and Mortgage Insurance
Premium.
PMI (short for private mortgage insurance) lets you buy a house with a conventional loan putting
less than 20 percent down -- in exchange for higher payments.
Private mortgage insurance is just what the name implies: insurance that covers the lender in case
the home buyer defaults. If you put less than 20 percent down on most mortgages, chances are
your lender will require you to have private mortgage insurance, commonly known as PMI. There is
no upfront fee for PMI.
For government loans there is no PMI; however, there is MIP (short for mortgage insurance
premium). MIP serves the same purpose than PMI; however, with MIP you have up front fees: 2.25%
added to the loan for FHA and 2.2% for VA. So with FHA, your loan amount putting a 3.5% down
payment instead of being 96.5% you would have a 98.75% of the purchase price loan amount. For
VA financing 100%, the loan amount would be 102.2% of the purchase price.
Paying PMI or MIP
The payment method is to include private mortgage insurance as part of your monthly mortgage
payment. PMI generally costs about 0.32% of the loan amount divided by 12 with 85% financing;
0.52% at 90% financing; 0.78% at 95% financing and 1% for 100% financing. There is no upfront
fee.
MIP is a bit different. About 1.15% of the loan amount divided by 12 for FHA. So the MIP monthly fee
for a $100,000.00 loan is $1,150.00/yr that is divided in 12 payments of $95.83 This is included in
your monthly payment. There is no MIP monthly fee for VA loans
You can cancel PMI
You don’t have to pay PMI forever. You can ask to have it canceled after you have built up 20
percent equity in your home. This means if your home is worth $200,000, you have at least $40,000
in equity in your home. And you don’t have to pay down your mortgage to build equity, either. If you
have made significant home improvements or your property has appreciated significantly in value,
you may be able to cancel private mortgage insurance even earlier. The lender may require you to
pay for an appraiser to establish your home’s value in today’s market.
If you signed your mortgage on or after July 29, 1999, a federal law requires lenders to
automatically – with a few exceptions – cancel your private mortgage insurance once you have paid
22 percent of the principal based on the original loan amount.
Lenders do have some leeway to refuse to cancel your PMI: if you are not current on your
payments, if there are liens against the property or if you have an exceptional amount of debt based
on your income.
Prior to the housing market crash, some people avoided private mortgage insurance by getting a
small home equity loan to “piggyback” on the mortgage. The piggyback loan pays for the rest of the
down payment so the buyer is able to put 20 percent down. These loans carry a higher interest rate
than the mortgage, but the interest may be tax-deductible. A financial advisor can help you figure
out how to determine if private mortgage insurance is the best way for you to buy a home
How To Cancel Mortgage Insurance Premium.
In the past, FHA borrowers have had to pay annual mortgage insurance premiums throughout the
entire life of their mortgages! If your loan closed before January 1, 2001, you are out of luck!The
only way to remove the mortgage insurance is to pay off the
loan or refinance the mortgage. Sorry, they say "no exceptions!"
Effective for all loans closed on or after January 1, 2001, FHA's annual mortgage insurance
premiums will be automatically canceled under the following conditions:
1. For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be
canceled when the loan to value ratio reaches 78%, provided the mortgagor has paid the annual
mortgage insurance premiums for at least five years.
2. For mortgages with terms 15 years and less and with loan to value ratios 90 percent and greater,
the annual mortgage insurance premiums will be canceled when the loan to value ratio reaches 78
percent, irrespective of the length of time the mortgagor has paid the annual mortgage premiums.
3. Mortgages with terms 15 years and less and with loan to value ratios of 89.99% and less will not
be charged annual mortgage insurance premiums.
Although the annual mortgage insurance premiums will be canceled as described, the contract of
insurance will remain in force for the loan's full term.
FHA will determine when a borrower has reached the 78% loan to value ratio based on the lower of
the sales price or appraised value at origination. New appraised values will not be considered. For
example, if the lower of the sales price or the appraised value at origination was $100,000, when the
loan amount reaches $78,000, FHA will no longer collect annual
mortgage insurance premiums on the loan. Cancellation of the annual mortgage insurance
premiums will normally be based on the scheduled amortization of the loan.
In cases where the borrower has made additional principal payments may request cancellation of
his/her mortgage insurance if the loan to value ratio has reached 78%, has paid mortgage
insurance for at least 5 years and has not been delinquent for more than 30 days at anytime within
the prior 12 months. As always, other conditions may apply.
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