Friday, September 28, 2012

Private mortgage insurance or MI


Private mortgage insurance or MI is a type of insurance provided by a private mortgage insurance company to protect a lender in the event of default on a loan. This type of insurance is generally required when a borrower has less than 20% equity in a home; i.e. the loan amount divided by the property value is 80.01% or greater.

Why does PMI exist? 
Mortgage companies have found that those with less that 20% equity are more likely to default on a mortgage.  The good news is that PMI allows homeowners to get into a house at good mortgage rates with less than 20% down.  That's about 1.5 Million homeowners in 1999 - about 10% of all mortgages. 
The purpose of PMI is to pay the mortgage company if the homeowner defaults on the mortgage.  

Who pays for private mortgage insurance?
The borrower pays for mortgage insurance on a monthly basis in addition to the principal and interest payments that are made on a loan. The lender then transfers these premium payments to the mortgage insurance company.

Besides a monthly premium, are there any upfront fees to pay?
Yes. MI companies offer several options to the borrower at the time of closing. A monthly premium plan requires two monthly premiums be paid during the closing, with a set monthly premium due thereafter as part of the required mortgage payment.
An annual plan requires one year of premiums paid at time of closing, with a lower monthly premium due thereafter.
It is generally recommended that the borrower choose the lower upfront insurance premiums at time of closing with a slightly higher per month premium due thereafter.

Do I have to pay mortgage insurance if I have less than a 20% down payment for a home?
No. There are several ways to avoid private mortgage insurance premiums.
The first is to purchase a home with a combination first and second mortgage. The first mortgage would be limited to 80% of the home's appraised value. The second mortgage, which would close in conjunction with the first, would then provide for the difference between the home's purchase price, less the 80% first mortgage, less the down payment available . In other words, if you have a 10% down payment available, your first loan would provide for the 80% mortgage with a second mortgage of 10%. This is commonly referred to as an 80 -10 -10 transaction.

Another way to avoid incurring MI payments is to find a lender that offers self-insured programs. This type of loan would have a higher interest rate in place of the private mortgage insurance premium. While mortgage insurance premium payments are not tax deductible, the interest associated with a self-insured mortgage would be fully tax deductible.

The decision of whether to obtain a loan with mortgage insurance versus the above two options should take into account the combined total monthly payments of the various options, adjusted for the tax benefits of interest deductions.

Once my loan to value ratio drops below 80%, can the MI be removed?
Yes. Lenders will allow borrowers to remove the MI requirement once the property's appraised value increases such that the loan to value ratio is below 80%. The reality of trying to accomplish this can be somewhat challenging. Usually the lender will require that an appraisal be done by the lender's approved appraisal companies. Contact your current mortgage holder to determine their policy on removing mortgage insurance from an existing loan.

Another means to remove the MI is to refinance the original mortgage with the higher appraised value used to determine the new loan's loan to value ratio. However, if the current first mortgage held b





When you think your home has appreciated to the point where you have enough equity to cancel your monthly PMI (Private Mortgage Insurance) payments - what do you do next?

You're not the only person to ask this question.  With the advent of 95%, 97%, and even 100% purchases, more and more people are putting less money down and counting on future appreciation.  That's about 1.5 Million homeowners in 1999.

Keep in mind that you need 20% equity to proceed.  There is a quick way to do this calculation:

Multiply your current loan balance by 1.25.  Your home has to be worth at least this much to legally get rid of the $40 to $120 premiums you pay every month.  

The 20% in equity can be earned by paying down the mortgage over time, appreciation, or home improvement.

Or of course by refinancing your loan.  Then the LTV (and PMI amount) is based solely on the appraised value and new loan amount, which makes a lot of sense if rates are lower now than your current rate, or if you PMI amount drops enough.
Or you can consider re-structuring your loan so you will not have PMI.

Why does PMI exist? 
Lenders have determined that those with more than 20% equity are less likely to default on the mortgage.  PMI allows homeowners to purchase a home with less than 20% down by insuring the lender against default.  

If not for PMI, everyone would be required to put at least 20% down on the mortgage. 

What has changed, I hear it's hard to get rid of PMI?
The Private Mortgage Insurance act took effect in July of 1999.  It gives homeowners a number of rights.

1) Lenders have to give you a written statement explaining that you have PMI and when you'll be allowed to cancel it.
2) The lender must allow you to cancel PMI when your equity is 22% or more.
3) And you can ask for permission once your equity reaches 20%.

The new law only affects new mortgages funded after July, 1999, but Fannie Mae and Freddie Mac have said they will apply the new rules to the older loans.

First Step - what is my home worth?
For a start, you can find online home valuation estimations on the web and get a rough sense of what your home is worth.  But sometimes the web sites can be off the mark.  And most importantly, these valuations are not acceptable for PMI cancellation purposes by the largest owners of PMI-insured mortgages - Fannie Mae and Freddie Mac.

Homeowners can also contact a local appraiser and ask whether they do "PMI Cancellation Consultations."  Some local appraisers will do a quick check for you for a small fee.  BUT, that will only tell you if you're in the ballpark.  The good news is that most of these appraisers will credit that small fee towards the full appraisal you'll need to cancel PMI.

I think my home is worth enough, what do I do next? 
To qualify for the cancellation, you'll have to demonstrate to the lender that the property is as valuable as you think it is.  
Don't hire someone and pay for a full appraisal before contacting the lender that services your loan.  

Under Fannie Mae and Freddie Mac rules, it is the lender-servicer, not the homeowner, who much choose the appraiser.  If you pay $300 for an appraiser, you're gambling that the servicer will accept that appraisal.  Fannie Mae requires that all of it's PMI Appraisals be ordered by its servicers from it's network of approved appraisers.

Request in writing to your current lender-servicer that the PMI be cancelled, and ask them to order an appraisal to verify the equity if you are depending on appreciation or home improvement to earn the equity.  If you have paid on the mortgage to such a point that you have 20% in equity, they can cancel without an appraisal in some cases. 

When can't I cancel PMI? 
The new laws apply to loans funded after July of 1999.  However, Fannie Mae and Freddie Mac have said they would honor the new laws on the old loans.  However, you need to review your loan document with your lender, some lenders require 25% equity.

FHA loans are not required to drop PMI under the same rules as conforming loans - if you have an FHA loan - expect to keep paying PMI for at least 5 years AND until your LTV is less than 78%.  Refinancing may be the best option for you.

Payment history is very important.  If you have a payment more than 30 days late in the past year, or a payment more than 60 days late in the past two years, the lender is not required to drop PMI. 

If you have a second mortgage or Home Equity Loan that makes the LTV of the first and second mortgage more than 80%, the lender is not required to drop the PMI. 

To Recap: 
1) Determine the estimated value of your home, and make sure it's enough to qualify.  
2) Contact the lender to whom you send your payments each month.  Ask the lender to order an appraisal to determine market value.  Keep all notes in writing.  
3) You need to keep an eye on your equity to determine when you can get rid of PMI, you are the person that cares the most about eliminating PMI.  
4) Consider applying the extra money you've saved towards the mortgage to pay the loan down faster.
5) Consider refinancing, or re-structuring your loan so you will not have PMI.




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