PMI Definition
Private mortgage insurance is a type of
insurance that helps protect the mortgage company against losses due to
foreclosure. This protection is provided by private mortgage insurance
companies and allows mortgage companies to accept lower down payments
than would normally be allowed.
Private mortgage insurance also enables
mortgage companies to grant loans that would otherwise be considered too
risky to be purchased by third party investors like the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC). The ability to sell loans to these investors is
critical to maintaining mortgage market liquidity, which in turn, allows
mortgage companies to continue originating new loans.
PMI
Cancellation
Mortgage insurance can usually be
canceled by the home buyer after he or she has at least 20 percent
equity in the home. Borrowers should contact their servicer to find out
the procedure for canceling mortgage insurance when they think they have
achieved 20 percent equity. Guidelines for canceling private mortgage
insurance are set by investors. Typically, investors will require an
appraisal on the property. The servicer can recommend qualified local
appraisers.
PMI Payment Options
Private mortgage insurance can
be paid on either an annual, monthly or single premium plan. Premiums are
based on the amount and terms of the mortgage and will vary according to
loan-to-value ratio, type of loan, and amount of coverage required by the
mortgage company.
Under an annual plan, an
initial one year premium is collected up front at closing, with monthly
payments collected along with the mortgage payment each month thereafter.
Monthly plans allow a borrower to pay only 1 or 2 months worth of premium
at closing, and then on a monthly basis along with the regular mortgage
payment. Under a single premium plan, the entire premium covering several
years is paid in a lump sum at closing. Typically, homebuyers choose to
add the amount of the mortgage insurance premium to the loan amount. By
doing this, homebuyers can reduce their closing costs and increase their
interest deduction.
PMI
vs. FHA MIP
Although the insurance
protection concept is similar, there are differences between private
mortgage insurance and FHA mortgage insurance. FHA insurance is a
government-administered mortgage insurance program that does have certain
restrictions. FHA has maximum regional loan limits that are lower than
those with private mortgage insurance. FHA may be more expensive, take
longer to receive approval, and have fewer payment plan options. FHA
insurance lasts for the life of the loan, unlike private mortgage
insurance which is cancelable in most circumstances. FHA is a good choice
for some borrowers with credit history problems that might need special
assistance.
Under recent law changes, both
PMI and FHA MIP will be discontinued by the lender when your loan is paid
down to 78% of it's original amount.
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