Episode 62, Segment 1: Everything You Need to Know About PMI
Ah, private mortgage insurance. At Supreme Lending, we often receive questions about PMI, or Private Mortgage Insurance. What is it? How do you pay it? Can you stop paying it after you reach a certain threshold on your loan payments? We've got all the answers to those questions and more below!
What is PMI (Private Mortgage Insurance)?
PMI is a type of mortgage insurance used with conventional loans. Like other kinds of mortgage insurance, PMI protects the lender if you stop making payments on your loan.
PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.
Again - if you put 20% down, you generally don't need PMI!
How do I pay for my PMI?
There are several different ways to pay for PMI. Some lenders may offer more than one option, while other lenders do not. Ask questions when you meet with lenders to find out what your choices are.
The most common way to pay for PMI is a monthly premium: This premium is added to your monthly mortgage payment.
Sometimes you pay for PMI with a one-time upfront premium paid at closing. This premium is shown on your Loan Estimate and Closing Disclosure on page 2, in section B.
If you make an upfront payment and then move or refinance, you may not be entitled to a refund of the premium.
Sometimes you pay with both upfront and monthly premiums. The monthly premium is shown on your Loan Estimate and Closing Disclosure on page 1, in the Projected Payments section.
The upfront premium is shown on your Loan Estimate and Closing Disclosure on page 2, in section B.
If the lenders you are working with offer more than one option, ask the loan officers to help you calculate the total costs over a few different timeframes that are realistic for you.
Can I drop my PMI? If so, at what point can I do that?
The Homeowners Protection Act gives you the right to request that your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage. If you can't find the disclosure form, contact your lender.
You can also make this request earlier if you have made additional payments to reduce the principal balance of your mortgage to 80 percent of the original value of your home.
There are other important criteria you must meet if you want to cancel PMI on your loan:
- Your request must be in writing.
- You must have a good payment history and be current on your payments.
- Your lender may require you to certify that there are no junior liens (such as a second mortgage) on your home.
- Your lender can also require you to provide evidence (for example, an appraisal) that the value of your property hasn’t declined below the value of the home when you first bought it. If the value of your home has decreased, you may not be able to cancel PMI.
If you meet these requirements, your servicer generally must cancel your PMI when you request it.
Automatic PMI Termination
Even if you don’t ask your lender to cancel PMI, your lender still must terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. You also need to be current on your payments on the anticipated cancellation date. Otherwise, PMI will not be terminated until shortly after your payments are brought up to date.
It’s worth noting a termination request is different than a cancellation request. Your lender must terminate PMI even if the principal balance of your loan has not actually reached 78 percent of the original value of your home – for example, because the value of your home declined.
Final PMI Termination
There is one other important requirement that some homeowners need to be aware of: your lender must terminate PMI if you reach the midpoint of your loan’s amortization schedule before the 78 percent date. The midpoint of your loan’s amortization schedule is halfway through the life of your loan. Most loans are 30-year loans, so the midpoint would occur after 15 years have passed.
Termination of PMI at the loan’s midpoint may occur before reaching 78 percent of the original value of your home for people who have a mortgage with an interest-only period, principal forbearance, or a balloon payment. Keep in mind that you must be current on your monthly payments for termination to occur.
If your loan is guaranteed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA), these rules generally won’t apply. If you have questions about mortgage insurance on an FHA or VA loan, contact your servicer.
*PMI information courtesy of consumerfinance.gov*
You can also visit consumerfinance.gov to learn tons of financial data and research statistics, as well as educational resources about subjects such as PMI.