Understanding Mortgage Insurance (PMI)

Mortgage Insurance covers the mortgage lender against loss caused by a mortgagor's default. It may cover all or part of the loss and it may or may not relieve any liability on the borrowers part if default on the mortgage occurs.

Private Mortgage Insurance (PMI) was developed to help borrowers purchase a home without putting 20% down as was required by banks and lenders many years ago. I like to think of it as a "hired co-borrower". Two out of five borrowers use PMI to get into home years sooner than they would otherwise. In fact, in the past 40 years PMI has helped make home-ownership a reality for more than 19 million families.

Different types of loans refer to it in different ways, and some loans have different requirements for the amount of coverage needed, but it essentially serves the same purpose. It helps protect the lender. Not all loans require mortgage insurance and the premium varies due to different criteria.

Conventional Mortgages
When the loan to value for an owner–occupied residence is more than 80% (or the borrower is putting less than 20% down) then Private Mortgage Insurance (or PMI), is typically required. The premium may be paid on an annual, monthly or single premium plan. (The most popular method of payment is the monthly method). The premiums are based on the amount and terms of the loan and may vary according to the loan-to-value, type of loan, term of loan and the amount of coverage required by the lender. The less the borrower puts down the higher the premium. PMI may be waived when the loan reaches 80% or less of the value of the property.

VA Mortgages
A VA loan is guaranteed by the Veterans Administration (VA) and the lender is required to collect an up-front one-time fee at closing called the "Funding Fee". This amount is between .50% and 3.00% of the loan amount depending upon the status of the Veteran and if the Veteran has used his VA Benefits previously to purchase a home. There is no monthly premium and there is no refund of the Funding Fee when the loan–to-value is reduced below 80% or if the loan is paid off early.

FHA Mortgages
Regardless of the amount of the down payment, FHA requires a one time upfront fee of 2.25% of the loan amount which may be financed in with the loan. In addition to the upfront fee there is a yearly fee of .50% of the unpaid balance of the loan which is divided into 12 equal payments and paid monthly in the house payment. If the loan is paid in full within the first 7 years there may be a prorated refund of the upfront premium paid. The monthly mortgage insurance premium may not be waived regardless of the loan to value.

Homeowners Protection Act
A federal law, called the Homeowners Protection Act, affects many loans originated after July 29, 1999. The law ensures that your PMI will be cancelled when your have reached a certain level of equity in your home. This means two things to you:

• Your lender must inform you, both at the time of closing and annually, about your right to request the cancellation of PMI.
• Your lender may be required to automatically cancel PMI at a certain point if you have not already requested that it be dropped.

How Does the Law Work?
The law is designed to help you better understand PMI. Here is what it requires:

• Initial Disclosure
  At closing, your lender must provide you with written notification explaining that you have PMI on your loan and how it may be cancelled.
• Annual Disclosure
  Each year, your lender must send you a reminder that you have PMI and that you may request cancellation once your have met certain requirements.
• Borrower Initiated Cancellation
  When your mortgage balance reaches 80% of our home's original value, your lender must cancel the PMI at your request if you are current on your mortgage payments, have no other loans on the house and satisfy any lender requirements confirming that your property value has not declined.
• Automatic Termination
  When your mortgage balance reaches 78% of your home's original value, your lender will automatically cancel the PMI if you are current on your mortgage payments.
• Note: If your mortgage is classified as a "High-Risk" mortgage, certain other conditions may apply. Ask your lender.

Does This Law Apply to FHA or VA Mortgages?
No. Mortgage insurance on FHA loans can not be cancelled and must be paid for the life of the loan. VA loans don't have PMI. It is called a Funding Fee and is paid or financed at closing and is a non-refundable one-time fee.

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