Private Mortgage Insurance

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.

 

 

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By visiting Allie Mae you have taken your first step toward becoming an educated borrower. Allie Mae is an objective, independent source of information for the mortgage consumer. Whether you are buying a home, refinancing, taking a home equity loan, building a home or in need of a mortgage for any purpose, Allie Mae is here to help. Allie Mae has helped thousands of people with their mortgage needs. We have a complete selection of articles, charts, calculators, and checklists designed to help you through the mortgage and home buying process.

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