Private Mortgage Insurance (PMI)

WHAT IT IS 

Mortgage Insurance (MI or PMI for private mortgage insurance) is an indemnification policy that a buyer purchases that protects the lender from buyer default. This insurance is required only when a property’s Loan To Value (LTV) is in the range of 80.1-100% (foreclosure risk).  In short, it is insurance that the lender requires due to the risk of a loan going into default. The borrower pays the premium for the insurance, but the lender receives the benefits. Therefore, it is a fee that the borrowers are required to pay until they can demonstrate that they are not a default risk.

Not all mortgage insurance is issued by private companies. Mortgage insurance began with government programs backed by the FHA and the VA. Government mortgage insurance is still available today, but the private plans have some advantages over the government programs:

*Private insurance is available on higher loan amounts.

        *Private MI is available on more types of mortgage loan types.

*In some cases, the cost of government mortgage insurance can be higher than for private plans.

*MI payments are competitive with or better than combo financing

*MI is cancellable—Seconds must be paid in full

*MI underwriting guidelines are more flexible

*One loan is simpler than two

*MI isn’t rate sensitive—costs don’t rise as they do with HELOCs

*MI makes it simpler and easier to refinance

WHY SHOULD I PAY FOR THE LENDER’S POLICY?

Studies have shown that homeowners with less than 20% invested in a home are more likely to default. That makes low-down-payment mortgages riskier for lenders and investors. Mortgage insurance helps cover this additional risk. Because they’re insured against this loss, lenders are willing to accept lower down payments (a standard down payment used to be 20% of the purchase price).   In a corollary fashion, borrowers benefit in that it permits the buyer to buy a more expensive home with a smaller down payment than might otherwise have been the case. 

With 2nd mortgages and HELOCs now unavailable above 80% loan to value, mortgage insurance is the only game in town, if a borrower is coming in with a down payment of less than 20%. Another disadvantage of adjustable rate 2nds or Home Equity Lines of Credit (HELOCs) is the lack of interest rate and payment caps. Simply put, M.I. is immune to rising interest rates and unlike HELOCs, it is cancelable whereas 2nds must be paid back in full and many of them like a 30/15 (a 2nd with payment amortized over 30 years but due in 15) have balloon payments to contend with, as well.

INELIGIBLE LOAN TYPES

Investment properties are not eligible for MI, but primary residences and 2nd homes are. Lender paid MI on loans with and LTV of 97% and/or 3/1 ARMs.

ADVANTAGES

*Flexible premium payment options are available—your lender can offer several options for MI payment

*Premium payments are temporary.

HOW DOES MI WORK? 

Lenders usually take care of arranging for private mortgage insurance after discussing with you the kind of mortgage insurance plan you can afford and that best fits your needs.  MI products include options for lender or borrower-paid premiums, and can be financed as part of the

mortgage, paid monthly or as a one-time upfront single premium. Various options afford a variety customized MI solution to be tailored to the borrower’s needs and income stream. 

Usually the mortgage insurance premium is added to your monthly principal and interest payment (along with your property taxes and hazard insurance) and in turn, the lender pays the mortgage insurance premium to the mortgage insurer.  You can also opt for a single financed premium plan in which your mortgage insurance is factored into the loan balance. 

WON’T M.I. JUST INCREASE MY MORTGAGE PAYMENT?

Yes, but mortgage payments are determined mainly by the interest rate and the loan amount. Mortgage insurance represents only a very small percentage of a borrower’s mortgage payment.

M.I.: WHO PAYS IT AND HOW IT’S PAID

There are two basic approaches regarding who pays it: the borrower or the lender.

                   1. Borrower Paid MI—with borrower-paid mortgage insurance (BPMI), the
               borrower pays the MI premium, either monthly or as a single upfront
               premium. Single premiums may be financed into the loan. A choice of
               monthly premiums or a single premium can be paid at closing or financed
               into the loan.

2. Lender Paid MI—the lender pays for the mortgage insurance and passes the cost of it on to the borrower in the form of a higher interest rate on the loan.   While this approach may result in reduced closing costs and a lower monthly payment for some homebuyers, lender paid mortgage insurance is provided for the life of the loan and is not cancelable.

A borrower has several payment options: a monthly premium, an annual premium, a single premium, and even a split premium. As payment options go, there’s pretty much something for everyone.  Here’s a sampling of the various plans and their corresponding benefits: 

*Monthly premium—the mortgage insurance premium is incorporated into your overall loan payment.  With this plan you can minimize the closing costs.  If MI coverage is cancelled, the unearned premium is refunded.

*Single Financed Premium Mortgage InsuranceBorrowers can pay a one-time lump sum payment.  Learn more This attractive option offers a low monthly payment and reduces the amount necessary at closing. Single Financed Premium MI is best for borrowers who want to minimize their monthly payment. The premium due at closing can paid by the borrowers or by a third party such as a builder or seller. It can also be financed into the loan amount. It is the lowest MI cost option for most consumers. Under the Homeowners Protection Act of 1998 (HPA), mortgage insurance is cancellable and the unearned premium is refundable.

               *Annual planyou pay an initial premium at closing and a renewal            
               premium each year that follows.  Borrowers can pay the first year premium
               at closing
or they can pay 1/12th of the premium monthly as part of their
               mortgage payment. The initial premium can also be financed into the loan
               amount.

*Hybrid MI or Split premium By splitting the MI cost into an upfront premium and a smaller monthly payment, it dramatically reduces a borrower’s monthly MI payment, which can help them qualify for a larger loan. Learn more The upfront premium gives the borrower a credit at closing, which is used to buy down the MI premium. Upfront single premiums can be .50%, .75%, 1.00% or 1.25% of the loan amount, with the balance of the MI premium paid monthly. There are two initial premium options:  full payment by the borrower at loan closing, or the financing of the initial payment into the loan.  The borrower may receive a refund of the financed portion of premium if MI is cancelled in the first two years. This program requires a 680 FICO score.

HOW SMALL CAN YOUR DOWN PAYMENT BE? 

Generally speaking, you’re going to need 3-5% as a minimum. 

COSTS

It varies. You’ll need less mortgage insurance with 15% down than you will with 5% down. It also depends on the type of mortgage and other factors. In general, the higher the LTV, the higher the factor and consequently the higher the cost will be.  Because of the variety of programs, variables and lenders it’s advisable to contact a mortgage lender like myself for actual pricing. 

CANCELLING MI

Homeowners with MI may request to cancel it when their equity reaches 80% and is automatically cancelled when the original LTV is paid down to 78%. 

M.I. DEDUCTION REPEALED

Congress repealed the law that it enacted in 2007 that allowed Private Mortgage Insurance (PMI) premiums to be tax-deductible for borrowers who make less than $100,000 per year.  Thus, mortgage insurance premiums paid or accrued after December 31, 2011, are no longer eligible to be treated as interest paid by the payer/borrower.

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