What is PMI? Do I have to pay private mortgage insurance?

What is PMI? Do I have to pay private mortgage insurance?

PMI (Private Mortgage Insurance) protects the mortgage lender from loss in the event of having to foreclose on your mortgage.

If you are one of the millions of people who plan to buy a house with little or no down payment, then you will have to pay PMI. If you are planning to buy with a VA or FHA mortgage, your home loan will not require PMI.

PMI premiums are paid monthly as part of your mortgage payment. In some cases it is separately itemized, and in others it is rolled into a higher interest rate. Your mortgage lender collects the premiums from you (usually monthly) and pays the insurer (usually on an annual basis). If the lender forecloses your property, they will sell the property and any shortfall between what they receive for the sale and the outstanding debt, the PMI insurer will cover. This takes away a lot of the risk that lenders faced when providing loans to buyers with little or no down payment and allows them to make these high loan to value loans.

There is a magical number where PMI is no longer required. If your down payment is equal to 20% or more of the house value, you will not generally be required to make PMI payments.

The need to pay PMI all comes down to the equity you hold in the house. Simply explained, equity is the difference between the CURRENT market value of the house, and the amount of borrowings on that house.

Here is where there is opportunity for you to avoid paying PMI. If your equity in your house is more than 20% of the current value, it may be possible for you to cancel your PMI policy.

Here's an example...

Let's say you purchased a house in Lancaster, CA in 1999 for $120,000. You put a down payment of $10,000, which equaled 8.3% equity. Because of the low equity you would be required to pay PMI that could range from $50 - $200 per month.

Now, in Lancaster, CA property prices increased about 15% in the year 2000/2001 and about 8% the previous year. The house you bought for $120,000 now has a market value of about $149,000 – but you owe only the original $110,000 you borrowed. You now have equity of $39,000 – equals about 26%. Because your equity now exceeds 20% you should be able to cancel your PMI and save that premium of $50 -$200 every month.

It is not always that easy though. The lender will continue charging you PMI even though your equity exceeds 20% unless you demand that the policy be cancelled. This is because federal law requires lenders to notify you ONLY when your loan balance equals 78% of the original loan. In most cases it would take you 10 – 15 years to pay down your loan to 78% of the original loan. Federal law is based on reduction of the loan amount, not on the fact that house prices can increase through demand, home improvements etc. In most cases, it takes only 4 years or so for your equity to build to over 20% based on property prices increasing at just 5% per year.

So, if you have already bought a home and are paying PMI or are considering buying a home and want to avoid PMI, remember the 20% equity rule. Knowing this, and keeping an eye on the market value of your house could save you thousands of dollars over the life of your loan. If your PMI runs at $50 per month, and you cancel it in 4 years instead of 15, you will save yourself $6,600 – quite a saving!

So, how do you have your PMI cancelled?

Fortunately, most home loans that require PMI have been sold to Fannie Mae or Freddie Mac in the secondary home loan market. For more information visit our buzzwords page. If you are lucky, your loan has been sold to them. They have much better PMI cancellation rules than the federal laws require.

If you have an on-time monthly payment record, and if your home loan is at least 2 years old they will look at your equity position and allow you to cancel PMI wherever possible.

If you are unlucky, your loan may not have been sold to either of these two, and you may find yourself with a loan servicer who refuses to allow you to cancel PMI until you are down to 80% of the original loan balance. As we said before, this could take 15 years to happen!

There are a couple of ways to deal with this:

        Hire a licensed appraiser who knows your local area. Your cost will be about
           $300, maybe more for a large or unusual home. Send a copy of the appraisal
           to your mortgage company with a request to cancel your PMI.

        If 1. doesn’t work, another method is to pay your PMI along with your
           mortgage every month. Never be late with the payment. Then sue your loan
           provider each month in your local small claims court, for the refund of the
           PMI. Be prepared to prove to the judge why PMI is not necessary. After a few
           months of default judgments, your loan servicor will probably cancel your PMI.

        If these don’t work, you can always go the refinance route. After all, if you
           have more than 20% equity in your home, you can refinance into a loan that
           does not require PMI. The closing costs make this a bit expensive, but the
           savings over the next 10 years could be far more than today’s cost of
           refinancing.

We hope this information has been helpful to you. If you are ready to start looking to buy a home, why not check out “Petersens Picks” which is a selection of Kent’s more interesting properties currently for sale in the Antelope Valley. If you would like to know more about the Antelope Valley, click here. You may find that the Antelope Valley offers alot more than you expected. For any questions you might have or for more information, just send us an email or give us a phone call. We think the Antelope Valley is an excellent place to live!