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: 1.75% 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 98.25% 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.
MIP is a bit different. About 0.5% of the loan amount divided by 12 for FHA, and no MIP
monthly fee for VA!
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: 1.75% 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 98.25% 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.
MIP is a bit different. About 0.5% of the loan amount divided by 12 for FHA, and no MIP
monthly fee for VA!
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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