PMI - Private Mortgage Insurance
Private Mortgage Insurance, or PMI, is insurance required by the bank or lender providing financing if the LTV, or loan-to-value is greater than 80%. PMI is important because it protects the bank or lender in the case that a borrower with a very high LTV defaults on their mortgage. And it is said to benefit the borrower by allowing them to finance a property with very little down in one single loan.
Homeowners can obtain 95% financing or higher if they agree to take private mortgage insurance, without the worry of needing a large down payment. And once the homeowner pays the mortgage down to 80% LTV, the bank or lender will no longer collect PMI. However, in the past many homeowners continued to pay PMI even after their LTV fell below 80% because the banks and lenders were not required to notify the borrower. It used to be the responsibility of the borrower to cancel PMI once they reached the 80% LTV mark, but recent laws have forced the banks and lenders to take responsibility as well.
All the confusion led to the Homeowners Protection Act of 1998 which established rules regarding termination of private mortgage insurance. The new law required home mortgages signed on or after July 29, 1999 to automatically terminate PMI once the homeowner reached 78% LTV, or gained 22% equity in their home, based on the original property value. The law also allowed homeowners to request the termination of PMI once they gained 20% equity in their home, or 80% LTV.
The Homeowners Protection Act of 1998 did come with some exceptions though. If your loan was considered “high risk”, if your property had additional liens, or if you were not current on your mortgage within the year prior to termination or cancellation, you could be stuck with your PMI until those issued are resolved.
The Homeowners Protection Act of 1998 also came with a few other useful provisions:
- Mortgage servicing must provide a telephone number for all their mortgagors to call for information about termination and cancellation of PMI.
- New borrowers covered by the law must be told - at closing and once a year - about private mortgage insurance termination and cancellation.
- Though the law does not cover loans that were signed before July 29, 1999, or loans with lender-paid PMI, lenders or mortgage servicers must tell borrowers about the termination or cancellation rights they may otherwise have under those loans (such as rights established by the contract or state law).
If you signed loan documents before July 29, 1999 you will have to manually terminate your private mortgage insurance once you reach 20% equity in your home, or 80% LTV or less. Be careful to pay special attention to this as the lender or bank is not required to notify you, and you will continue paying PMI if you fail to act.
Additionally, the Homeowners Protection Act of 1998 does not cover FHA or VA loans, or loans with lender-paid PMI.
There are many other specific statewide rules and rules for Fannie Mae and Freddie Mac loans, so always do your own due diligence, and contact your bank or lender to get all the facts for your particular loan in your state.
The cost of private mortgage insurance can vary greatly, and carries its’ own adjustments just as the associated loan would. So if the property is an investment with a low Fico score, the cost will be higher than a primary residence with a great credit score.
MGIC has an automated system that allows you to calculate private mortgage insurance.
You can avoid paying private mortgage insurance altogether while still putting no money down by utilizing a combo. If you keep your first loan at 80% LTV or less, and add a second loan of 20% or less, you can still attain 100% financing without paying PMI. Along with that, you’ll likely obtain better financing by splitting the loan up. Learn more about mortgage combos and blended rates.
Or you can look into the Bank of America No Fee Mortgage, a so-called no cost loan that doesn’t require mortgage insurance, presumably even if the loan exceeds 80% loan-to-value.
Most homeowners these day opt for a second mortgage instead of doing one loan to avoid high interest rates and private mortgage insurance. The only real downside is the associated fees with a second mortgage, and the two separate payments. Either way, you should always explore the possibility of two loans to determine which will be a cheaper alternative.
