An often overlooked cost of buying a new home is private mortgage insurance, usually simply called PMI. The basic idea behind PMI is simple. When a home buyer buys a house with less than 20% of the home’s value as a down payment, the mortgage lender assumes a larger risk. In most cases, the lender will require that the buyer – that’s you – purchase private mortgage insurance that will pay off your mortgage if you default on it.
Because PMI is an added expense for the consumer, the federal government has a number of regulations regarding PMI. There are specific rules that mortgage lenders must follow if you signed (or will sign) a mortgage after July 29, 1999. That’s when The Homeowner’s Protection Act of 1998 (HPA) went into effect. In addition, many states have their own laws regarding private mortgage insurance that are designed to protect homeowners and save them money.
Like many other things about buying a new home, the rules surrounding private mortgage insurance can be confusing. Here are some answers to commonly asked questions about PMI to help make it a little clearer.
Who has to pay PMI?Most lenders require private mortgage insurance from home buyers who put down less than 20% of the total value of their home – or conversely, who borrow more than 80% of the total value of their home. This isn’t a hard and fast rule, though. Many lenders are loosening their requirements for PMI to buyers with good credit, or who meet other requirements.
How much does PMI cost?Usually, the premiums on private mortgage insurance are about .5 percent of your loan total. If you take out a mortgage for $100,000, the PMI premium for the first year will be around $500. On a $200,000 mortgage, you’ll pay about $1,000 for the first year’s premium. Usually, your premiums will be lower each year, since it’s based on the amount that you owe on your mortgage.
When do I have to pay the PMI premiums?Most lenders require that you pay the first year’s premium at closing, so don’t forget to add it in when you’re figuring out your closing costs. For subsequent years, you’ll pay it along with your monthly mortgage payment.
Do I have to pay for PMI until my mortgage is paid off?No. The length of time you have to maintain PMI varies from state to state and lender to lender, but you can generally cancel your PMI when you have between 20% and 25% equity in your home. The actual PMI percentage depends on the default mortgage rate in your state. There are usually other requirements as well, such as no late payments in the year before you request cancellation, and no other mortgages or liens against your property.
How do I cancel my PMI?Under the provisions of the HPA, your lender must automatically terminate your PMI when you’ve paid down your mortgage to 78% of the original purchase price or the appraised value of your home when you bought it, whichever is less, as long as your mortgage payments are current when you reach 78%. If the mortgage was considered a high risk loan, it can be when you reach 77%.
What does my mortgage lender have to tell me?When you close on your house, you must be informed of:- the date that you can request cancellation of PMI- when your PMI will be automatically terminated
Once a year, you must be informed of:- your right to cancel or terminate your PMI- a contact address or phone number where you can find out when you can cancel your PMI
When your PMI is canceled, you must be informed that:- Your PMI has been canceled, and you no longer have private mortgage insurance- You no longer have to pay premiums for your private mortgage insurance.
What this all means is in terms of researching your home purchase, be wary of PMI consideration. Do your homework and determine what the best scenario is for you.