Private Mortgage Insurance (PMI)

if you make a down payment of less than 20% of the purchase price of the home, mortgage lenders generally require that you take out Private Mortgage Insurance (PMI) that protects the lender in case you default on your mortgage. PMI exists to protect the lender in the case that the borrower defaults on the loan and cannot recoup the losses in a foreclosure and sale of the mortgaged property. The annual cost of PMI varies and dependant on factors such as loan type, loan term, percentage of the total home value that is financed, the coverage amount, and the frequency of premium payments (monthly, annual, or single).

As a borrower, you may need to pay up to a year's worth of premium for this coverage at closing, which can amount to as much as several hundred dollars. One obvious way to avoid this extra cost is to make a 20% down payment. There are also other ways to eliminate PMI by getting a second mortgage (frequently called a "Piggy-back loan"). One such example of a second mortgage is a 80-10-10 mortgage financing which is a special type of financing created to avoid paying additional PMI. However, before you give up on PMI, you should also be aware that the government passed a law in 2007 that allows PMI to be tax-deductible. Therefore, if you are considering PMI vs a 80-10-10 mortgage, you should carefully consider the financial scenarios of both situations.

PMI Payment Options

PMI fees can be paid in several ways, depending on the PMI company used. Borrowers can choose to pay the first-year premium at closing; then an annual renewal premium is collected monthly as part of the house payment. Or the borrower can choose to pay no premium at closing, but add on a slightly higher premium monthly to the principal, interest, tax, and insurance payment. Buyers who want to sidestep paying PMI at closing but not increase their monthly house payment can finance a lump-sum PMI premium into their loan. With this type of payment plan, should the PMI be canceled before the loan term expires (through refinancing, paying off the loan, or removal by the loan servicer), the buyers may obtain the rebate of the premium.

Removing PMI

Private Mortgage Insurance is required until 20% of the value has been paid off. At this point, the borrower can request removal by contacting their lender. At 22%, it is required to be removed by law. However, there are exceptions - for instance, if there is a history or missed payments within the last year a loan may be considered "high risk" and PMI may be kept in place. Another example would be if there is an outstanding lien on the property.

Regardless, if you are considering paying less than 20% down for your purchase, you should ask your mortgage lender about PMI. Typically lenders will shop around for the PMI insurance on your behalf and have a few companies they frequently work with.