QUESTION: Why do I need private mortgage insurance?
ANSWER: Most lenders require PMI to protect them against default on loans with down payments of less than 20%.
Several lending industry studies show that low-down borrowers are more likely to default than those who make larger down payments.
Depending upon the policy, the insurer will pay the lender from 20% to 30% of the mortgage balance should you default on your mortgage. That’s generally more than enough to offset the cost the lender incurs to foreclose, repossess and resell your home.
Don’t confuse mortgage insurance, which protects lenders, with homeowners insurance, which lenders require but which protects you.
Basic homeowners insurance protects you from certain losses caused by due to wind, fire, lightning, explosion, theft, vandalism and other causes. Lenders require that you protect your home from such losses because they also have a stake in your home.
Q: How much does PMI cost?
A: Premiums depend upon the size of the mortgage and the size of the down payment. PMI is less expensive for a fixed-rate mortgage than for an adjustable loan.
Ten percent down on a 30-year fixed-rate mortgage for a home costing the national median of $119,000 will cost you an average $45 a month ($540 a year), according to Mortgage Insurance Cos. of America. Put 5% down and the premium goes to $70 a month or $840 a year.
The figure starts to soar when you consider more expensive homes in regions where homes cost twice as much or more than the national average. Put 10% down on a $200,000 home purchased with a 30-year fixed-rate mortgage and you’ll pay $75 a month in PMI premiums. If the buyer manages only 5% down, the premium is $120 a month or $1,440 a year, an amount easily equal to a 13th mortgage payment on a $200,000 home.
Q: How do I get rid of PMI payments?
A: With savvy, persistence and all the right moves. First, determine who holds your mortgage so you can learn how to qualify. Don’t expect the lender to notify you when you qualify for cancellation.
Lenders who sell their loans to investors on the secondary markets (largely dominated by Fannie Mae and Freddie Mac) will drop PMI provided you meet certain guidelines after you’ve held the mortgage for two years and make the appeal in writing (by certified, return-receipt mail) to your lender.
When you make the appeal, attach a copy of the appropriate Fannie Mae, Freddie Mac, state or other rule or regulation, so the lender is aware you know your rights.
Fannie and Freddie rules vary somewhat, but generally they say that to stop paying PMI premiums, you must meet the following conditions: Your home equity must be equal to 20% of the original purchase price, your home should not have declined in value during that period, you must have a near-perfect mortgage payment record and you must pay to prove your case by buying an appraisal.
California, Minnesota, Connecticut and Maryland generally demand that virtually all lenders remove PMI by the time equity reaches a higher level, 25%, provided homeowners meet guidelines similar to those from Fannie Mae and Freddie Mac.
States have also added disclosure requirements to their rules. California, for instance, demands that lenders disclose PMI information within 30 days after you close escrow.
Q: Do FHA mortgages require PMI?
A: Thirty-year FHA loans come with mutual mortgage insurance (the government’s own PMI). MMI features automatic expiration, but only after 12 years on a 5% down loan and seven years on a 10% down loan. If your down payment is less than 5% on a FHA loan, you are stuck with MMI for the life of the loan.
Q: What can I do if my mortgage wasn’t sold to Fannie Mae or Freddie Mac?
A: Not much. Unless they operate in states that mandate removing PMI at some point, private lenders who hold mortgages in their own portfolio aren’t required to remove PMI, and many of them won’t. Don’t let that stop you from appealing to their good graces. Don’t forget, you can always refinance.
Q: Are there other ways to avoid paying so much PMI?
A: Yes, with some effort. Even though you can’t choose your own PMI company, you can choose your lender. If all else is equal, borrow from the lender with cheaper PMI rates.
Also search for low-money-down loans without PMI. Most of these loans are fixed (a few are adjustable) at slightly higher-than-market interest rates, but do the math to determine if such a loan is of value to you. Remember, interest and taxes are deductible. PMI isn’t.
Q: How do I pay my PMI premium each month?
A: Some lenders require that you set up an escrow account similar to that used to collect and disperse your taxes and homeowners insurance. You pay into the account and, later, the lender disperses the funds.
Some lenders require that you pay up to a year of PMI premiums in advance to the escrow account. Monitor it carefully. New federal regulations require lenders to analyze your escrow account each year, because, in the past, many lenders didn’t, leaving the borrower in the lurch.
If there’s too much money in your account, you could be due a refund. On the other hand, if there isn’t enough, your payment might increase to cover the shortfall.
Q: Where does PMI come from?
A: There are eight PMI insurers in the country, and in 1996 there were 5 million PMI policies outstanding, covering $513 billion worth of mortgages.
Q: Can I choose where I want to buy PMI?
A: No. The lender, who is considered the at-risk party, picks the company it wants to deal with.
Q: Can I see a copy of my PMI policy?
A: No. Even though you are paying the premiums, you can’t get a copy of the policy.
Source: Insurance News Network.