Brief Description of PMI!

[Greg Szymbor]

What is PMI?

PMI, or private mortgage insurance, is a lender's protection in the event that you default on your primary mortgage leading to foreclosure on your home.

Lenders typically require a down payment equal to 20% of a property's purchase price when borrowers apply for a home loan. If a borrower is unable to afford that amount, a lender will typically look at the loan as a riskier investment. In which case they will require that the borrower take out PMI.

PMI may cost between 0.5% and 2% of the entire loan amount annually and is usually included in the borrower's monthly mortgage payment. However, there are annual and one-time payment methods as well!

For example, say you had a 1% PMI fee on a $150,000 loan. The fee would add approximately $1,500 a year, or $125 each month, to the cost of your mortgage. If your lender allows it, you may be able to do a one-time charge of 3-5% of the loan amount at closing.

If the mortgage insurance was financed at the time of origination and is canceled prior to its maturity you may be entitled to a REFUND if the refundable option was chosen at time of origination. However, if there is no refund/limited option, this would negate any option for a refund. Talk to your lender and see if you can get REFUNDED the PMI payments when you reach the correct LTV ratio!

When your loan reaches an 80% LTV, you can request that your mortgage insurance be cancelled; this must do in writing. However, cancellation at this point is still done on a voluntary basis by the lender. It's not legally required until the 78 percent pay down level is reached!

Private mortgage insurance should not be confused with credit life insurance; it will not pay your mortgage each month should you become disabled, unemployed or deceased, and pays nothing to you or any of your beneficiaries. And remember PMI has been tax-deductible since 2007 and, by an extension voted by Congress, it is also in 2018.

Looking to grow and gain experience in my journey of real estate blogging, so constructive criticism and feedback is encouraged!

[Jonathan Bombaci]

Very good explanation I may steal this to use with my First Time Home Buyers. There are a few exceptions to the rule. I've done both of these and just want to share for knowledge transfer. 

PMI is typically required when you're putting less than 20% down but there are of course exceptions:

My Wife and I did what is called a 80/15/5 loan which was a standard mortgage (80%) with a Home Equity Line Of Credit or HELOC (15%) and put a 5% downpayment down. This was an option I shopped for because I didn't want to deal with PMI (again) and found a credit union that offered it and was willing to do it. We had good credit scores and a low debt to income ratio we just didn't want to tie up so much $$ in our house.

The other exception is when you find a lender that does Loan To Value (LTV) lending. Most banks, on the residential side anyways, do a Loan To Cost (LTC) lending.

Scenario: you buy a house for $100,000 and it appraises at $120,000. Bank A will lend you 80% on a COST basis Bank B will do 80% on a VALUE basis. It's the same house but Bank A will lend you $80,000 without PMI (80% of $100k) while Bank B will lend you $96,000 without PMI (80% of $120k).

If you ask the right questions of lenders you'll be surprised what they say. Just make sure you're prepared to talk business.