Private Mortgage Insurance (PMI)Private mortgage insurance(PMI) is insurance that protects the lender in case you default on your mortgage and cannot recoup the losses in a foreclosure or sale of the mortgaged property. Lenders require that you take out private mortgage insurance if you make a down payment of less than 20% of the purchase price of the home. PMI Cost The annual cost of PMI varies depending 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. Premiums may be paid monthly, annually, or in a lump sum at closing. As a borrower, you may need to pay up to a year's worth of premiums for PMI when you purchase your home. This can amount to as much as several hundred dollars or more. One obvious way to avoid this extra cost is to make a 20% down payment. But there are other ways to eliminate PMI. Avoiding PMI Take out a second mortgage, often called a piggy-back loan, and use it to make the 20% down payment required. An example of a common second mortgage strategy is 80-10-10 mortgage financing. This special type of financing was created to help borrowers avoid paying PMI premiums. Before you give up on PMI, you should be aware that the government passed a law in 2007 that allows PMI premiums to be written off as tax deductions. Therefore, if you are considering the difference between PMI and an 80-10-10 mortgage, you should weigh the financial costs carefully. Your second mortgage may not be tax-deductible. 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 with an annual renewal premium collected monthly as part of the house payment. Otherwise, the borrower can pay no premium at closing but add a slightly higher premium monthly to the principal, interest, tax, and insurance payment made on the mortgage itself. Buyers who want to sidestep paying PMI at closing and avoid increasing their monthly house payments can finance a lump-sum PMI premium into their loan. With this type of payment plan, should the PMI be canceled through refinancing, paying off the loan, or removal by the loan servicer before the loan term expires, the buyers may obtain a rebate of the premium balance. Removing PMI Private mortgage insurance is required until 20% of the home value has been paid off. At this point, the borrower can request removal by contacting their lender. At 22%, lenders must remove PMI voluntarily. This is required by law. But there are exceptions. For example, if the borrower has had a history of missed payments within the last year, the loan may be considered "high risk" and PMI may be kept in place. PMI may also be retained if there is an outstanding lien on the property. Regardless, if you are considering paying less than 20% down for your home purchase, you should ask your mortgage lender about PMI. Typically lenders will shop around for the best PMI insurance quote on your behalf and recommend a few companies they frequently work with. |
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