Private Mortgage Insurance (PMI)



What is PMI?

Private Mortgage Insurance (PMI) is required on all home loan transactions where the loan-to-value ratio is 80 percent or greater (Some cash-out refinance transactions require PMI at 75% loan-to-value). This means that if you bought your house for $100,000 and had a down payment of less than $20,000, you will be required by the lender to carry PMI. It makes sense as most expensive purchases in life require insurance. When you buy a new car, you are required to get car insurance.

Private Mortgage Insurance insures the lender – not you – against your default on the loan. Because statistics show that borrowers who put down less than 20 percent are more likely to default on the loan, lenders require PMI so that they’ll recoup their investment in case of default. Without the guarantee from carrying the PMI, the lender would not make the loan, but they’re willing to take the risk as long as you carry PMI. As a borrower this may provide you with a lower interest rate loan than you could originally obtain, but the mortgage insurance premium (MIP) may not be saving you any money in the end.

How do you get rid of PMI?

Private Mortgage Insurance is of concern to the borrower because, unlike mortgage interest, PMI is not tax deductible. You pay it and you never see a dime of it again. For this reason, you will want to get rid of it as soon as possible.

When can you stop paying PMI? The lender cannot force you to keep the PMI once the loan- to-value has gone below 80 percent, however, the lender will not advise you when you are eligible to discontinue the coverage and stop making that mortgage insurance premium (MIP) payment. So what you want to do first is to take a look at your most recent mortgage statement and divide the remaining principal balance by the original purchase price of your home. If that number is below 80 percent, call the lender and find out their procedure for removing PMI. It is the responsibility of the borrower to track the debt to value ratio and make all the arrangements to stop the PMI coverage.

It is important to note that even if you haven’t been paying on the loan for very long, you still may qualify for having PMI removed by virtue of appreciation. This occurs when the value of your home increases shortly after you have purchased it. The lender probably will require a full appraisal, which will typically cost you approximately $300. But you will quickly recover this cost by not having to pay the MIP and therefore canceling the PMI. After the cost is recovered, the amount you were spending on PMI goes in your pocket. You can also pay a little extra each month toward the principal to reduce your loan balance and shorten the time you must pay PMI.