Private Mortgage Insurance
WHAT IS PMI?
PMI is short for Private Mortgage Insurance. It is an insurance policy that applies to conventional mortgage loans when the down payment or borrower equity in the home is less than 20%. Lenders refer to this in terms of loan-to-value (LTV) ratio. For instance, in a purchase transaction, if you put down 20% of the purchase price, the LTV would be 80%. (20% + 80% = 100% of the purchase price) The policy protects the lender in the event that the borrower defaults on the mortgage payments. For instance, if a borrower were to default on the loan, and the lender were to take the home in a foreclosure, the lender might be faced with trying to remarket the home in a depressed market where the market value of the home was less than the amount of the outstanding loan…plus they would have to pay attorney fees, court costs, property maintenance, outstanding property taxes, insurance, etc. The PMI policy helps the lender recapture some of these losses, and stabilizes the risk of lending.
WHAT IS THE BENEFIT OF PMI?
PMI allows you purchase more home with less than a 20% down payment using conventional financing. Banks traditionally prefer you to put 20%, but the PMI policy helps balance the risk for the lender, so the lender will lend more against the value of the home.
CAN PMI BE TAX DEDUCTIBLE?
PMI can be tax deductible on your income tax return. The amount that you are able to deduct is related to the amount of income that you file for the tax return and, like all tax deductions, is reviewed each year and is subject to changes in the US tax code. To determine if PMI is deductible for you, be sure to consult your tax advisor.
DIFFERENT KINDS OF PMI
There are 4 basic types:
HOW ARE PMI POLICY PREMIUMS DETERMINED?
In 2019, PMI companies in the US moved to a risk-based pricing model. There are several factors that are considered in your estimated premium including:
HOW TO REMOVE PMI
Most homeowners who have PMI often ask, "how can I remove PMI" or "how soon can I cancel PMI"? The good news is that consumers have rights when it comes to canceling the PMI policy on their loan.
Consumers are protected under a law called The Homeowners Protection Act (HPA or PMI cancellation act) which was signed into law 07-29-1998 and became effective 07-29-1999.
There are two ways to remove PMI:
To request an early cancellation, follow these steps:
Want to know more to more about Private Mortgage Insurance? Check out the above interview with Beth Larson with ESSENT Guaranty, one of the six PMI companies in the US for valuable insights.
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HAVE A QUESTION?
This is not a commitment to lend. Not all borrowers will qualify for the loan programs listed. All program terms and conditions are subject to change and may be discontinued without prior notice. Contact loan originator for program questions and scenarios.