What is private mortgage insurance?
Private mortgage insurance (PMI) is
insurance that protects a lender or investor against loss if a borrower
stops making mortgage payments. It makes it possible for you to buy
a house with as little as a 3-to-5 percent down payment, helping you
buy a home sooner than you otherwise could. Studies show that homeowners
with less than 20 percent invested in a home are more likely to default,
making low down payment mortgages more risky for lenders and investors.
That's why lenders and investors generally require mortgage insurance
for loans with down payments of less than 20 percent.
What's the benefit?
PMI makes it possible for you to buy
a house with a low down payment and get into a home years sooner than
you would otherwise. If you're a first-time buyer, PMI helps you get
over the biggest hurdle to home ownership: coming up with the traditional
20 percent down payment. If you're a trade-up buyer, mortgage insurance
allows you to consider a wider range of homes. Both first-time and
move-up buyers can benefit by putting less money down and keeping
cash for other uses: making investments, paying off debt, or paying
for home improvements or emergencies.
How much does it cost?
Premium prices vary. They are based
on the size of the down payment, type of mortgage and amount of insurance
coverage. Premiums typically are folded into your monthly mortgage
payment. The range for a median priced home is $50 to $80 per month
(in 2001, the national median price for a single family home was $147,500).
You can pay the premium up front and finance it as part of your mortgage.
Lender-paid policies also are available, but they result in a higher
interest rate on the mortgage.
How do I qualify?
The qualifying process for loans covered
by mortgage insurance is similar to that for regular mortgage loans.
Generally, you need to have enough income to cover the monthly mortgage
payment and closing costs, and a good credit background. Many mortgage
insurance programs offer flexible underwriting features, such as alternative
methods of credit verification.
Can I get a loan with PMI if I have
a low income?
Yes. If you're a lower-income, first-time
buyer, you may be eligible for special programs that make it possible
for you to buy a home with 3 percent or less down (apply
thru Allie Mae for assistance). Their flexibility makes it possible
for many lower-income buyers to achieve home ownership: Programs are
tailored to community needs and involve partnerships with local groups.
They feature education programs that help you learn about the home
buying process and counseling to help you keep your home if you run
into financial trouble. They offer a variety of options in such areas
as down payment, PMI premium and credit verification. Evidence of
on-time rent and utility payments, for example, can substitute for
a more traditional credit history. Check with your lender to see if
you're qualified for an affordable housing program.
Can I get PMI if I'm refinancing
my loan?
Yes. Refinancing with PMI can increase
your financial flexibility. You can get cash to pay off consumer debt,
make other investments, or cover college tuition or medical bills.
If you have a piggyback or 80-10-10 loan, you can refinance with PMI
and get rid of that second mortgage.
Can I buy PMI directly from an insurance
company?
No. The lender arranges for private
mortgage insurance coverage on your loan. A range of PMI products
with a variety of payment options is available to meet your needs.
When you shop for a loan, ask lenders about your PMI options. Why
did I get a letter saying my PMI application was denied after my lender
said my insured loan was approved? Lenders make the arrangements for
PMI coverage on loans. They often send a mortgage application to more
than one insurance company. One company may approve an application,
while another may not. If a company denies coverage on a loan, it
sends a letter to the borrower explaining why. The lender, meanwhile,
may have obtained coverage on the loan from another company.
Can I cancel PMI?
Yes. PMI usually can be cancelled when
the homeowner builds up enough equity in the home. Under federal law,
PMI on most loans made on or after July 29, 1999, will end automatically
once the mortgage is paid down to 78 percent of the original value
of the house. Do I get a refund when my insurance is cancelled? It
depends on the type of premium plan you have. Most borrowers opt for
the pay-as-you-go plan. With this plan, you pay for PMI a month at
a time. When insurance is cancelled you stop paying premiums, but
you don't get a refund. With plans in which you pay your premium up
front, at closing, or annually, you may get a refund. Consult your
lender.
What is a piggyback loan?
Some lenders offer low down payment
loan products that don't carry mortgage insurance. The most typical
is the piggyback loan, also known as the 80/10/10 or 90/20. The piggyback
stacks a high-rate small second mortgage on top of a lower-rate first
mortgage. The piggyback can have several drawbacks, but can also be
a good option for many borrowers. Consult Allie Mae for more advice.
What's the difference between PMI
and FHA insurance?
Private mortgage insurance is the private
sector alternative to the Federal Housing Administration mortgage
insurance, which is a government program backed by taxpayers. There
are some important differences:
PMI generally costs less. It covers the top 20 to 30 percent of the
loan, while FHA insures 100 percent of the loan.
PMI
is available on a wider variety of loan products, and there's no maximum
loan amount. FHA loans are subject to maximum loan amounts, depending
on the cost of housing in your area.
How is PMI different from other types
of insurance associated with home ownership?
PMI is not mortgage life insurance,
which pays off a mortgage if you die or become disabled. It is not
homeowners' insurance, which protects you from loss from theft, fire
or other disaster. Mortgage insurance protects the lender and investor
from loss, not the borrower. PMI protects the lender, in the case
that you should default on your payments.
