If you’re thinking about purchasing a home, you may have heard
the term “PMI” (private mortgage insurance). So what is it?
Private mortgage insurance (PMI) is insurance that mortgage lenders require from home buyers when the down payment is less than 20 percent on a “conventional” mortgage.
Needless to say, many prospective home buyers are unwilling or unable to come up with a twenty percent down payment. So, the lender will accept your down payment and ask a "private mortgage insurance company to "guarantee" the difference between your down payment and the required twenty percent.
For example, if your down payment is 5%, the private mortgage insurance will pay the lender the “missing 15% down payment if you default on the mortgage. A "PMI" fee is paid to the private mortgage insurance company for the default guarantee. Private mortgage insurance companies offer different payment plans, including monthly or a one-time, upfront payment. Another popular option is the lender paid pmi. Many mortgage lenders will pay the pmi cost on behalf of the borrower in exchange for a slightly higher interest rate.
The private insurance premium is based on down payment (a larger down payment reduces the cost), where the home is located (high default counties incur a higher premium), credit score, the term of the mortgage (15 year mortgages pay less), and a few other factors.
Assume you are purchasing a home for $100,000 with 5% down
payment ($5,000). Your mortgage amount will be $95,000 ($100,000 -
$5,000 = $95,000).
Assume the PMI premium at .67%.
Here’s the math:
Mortgage amount = $95,000
X .67% (estimated)
= $637.00 per year
Divided by 12 months = $53.04
The PMI premium will vary from PMI company to PMI company; and the monthly cost will vary based on a number of variables previously discussed (i.e. credit score, term, location of the home, etc.)
Over the years, the banks have found that when there's at least 20% equity (down payment), they can easily sell the home after foreclosure at 80% of the value of the home. Using the example above, the home buyer pays 5% ($5,000) to the bank.
The PMI company pays 15% ($15,000) to the bank when the home buyer defaults. The bank can sell the home valued at $100,000 for $80,000.
Under The Homeowner's Protection Act, you have the right to request termination of PMI premium when you reduce your mortgage balance to 80% percent of the original value of the home. The Homeowner's Protection Act requires the lender to cancel the PMI cost, when the principal balance reaches 78 percent of the original value of your home.
You also need a good payment history, which means that you have not been 30 days late with your mortgage payment within a year of your termination request, or 60 days late within two years.
The lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan. The Homeowner's Protection Act does not apply to Veterans Administration (VA) loans or FHA loans.
Yes, although, it's called "mip", mortgage insurance premium. The monthly FHA mip is used to support the FHA loan program. Unlike pmi, the monthly mip will never goes away, even if you have 20% or more equity.
It depends on the initial down payment. The best way to determine the length of time is to use an amortization schedule to see when the mortgage is reduced to 80%.