PMI Private Mortgage Insurance - Learn about PMI Insurance, private mortgage insurance.
The purpose for private mortgage insurance is to insure conventional mortgage lenders, banks, credit unions and a mortgage banker, against foreclosure losses on the mortgage amount exceeding 80 percent of the home's value.
For example, suppose you buy a $100,000 house or condo for nothing down with a $100,000 PMI mortgage. In addition to your monthly principal and interest mortgage payment, plus property taxes, you will also have to pay a PMI premium. If you default and the lender suffers a foreclosure loss, the PMI insurer will pay the lender any loss exceeding 80 percent of the loan balance. That's up to $20,000 in this example.
Said in other words, PMI's protect mortgage lenders, not borrowers. But PMI enables "cash challenged" home buyers to purchase homes for which they don't have enough of a down payment available.
With good income and good credit, home loan borrowers can obtain PMI mortgages for 90 percent, 95 percent, 100 percent and sometimes even 103 percent (including closing costs) of the residence's purchase price.
PMI Negatives - Private mortgage insurance is not free. PMI premiums usually add an additional $50 to several hundred dollars per month depending on the loan amount and the insurer's risk.
Your PMI premium is not tax deductible like mortgage interest.
HOW TO CANCEL YOUR PMI In 1999, Congress enacted virtually worthless legislation requiring lenders to cancel PMI premiums when a borrower's loan-to-value ratio drops below 78 percent of the original loan balance.
However, this law doesn't consider (a) market-value appreciation of the home or (b) a homeowner's capital improvements, which increase the market value of the residence. The cruel result for PMI borrowers is it takes at least 10 years to meet the "78 percent" test by paying down their mortgage balance.
Fortunately, most mortgage lenders instead have adopted the Fannie Mae and Freddie Mac guidelines. These rules allow PMI cancellation after at least 24 months of on-time mortgage payments when the borrower's home equity is at least 20 percent as shown by a new appraisal from a lender's "approved appraiser" paid for by the borrower.
However, it is up to the PMI borrower to initiate PMI cancellation with the lender. If you think you are eligible to cancel PMI, contact your loan servicer.
You will then be informed you must pay an appraiser from the lender's approved list. Typical appraisal fees are $300 to $400. That is a very profitable expense to get rid of your no-longer-needed PMI premium after the lender has virtually no foreclosure loss risk.
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