Private mortgage insurance, or PMI, is a cost of buying a new home that people often forget about. The idea behind PMI is easy to understand. When a buyer puts down less than 20% of the home's value, the mortgage lender takes on more risk. Most of the time, the lender will insist that you, the buyer, buy private mortgage insurance. This insurance will pay off your mortgage if you don't pay it.
Since PMI is an extra cost for the consumer, the federal government has put in place a number of rules about it. If you signed or will sign a mortgage after July 29, 1999, the lender must follow certain rules. The Homeowner's Protection Act of 1998 (HPA) became law at that time. Also, many states have their own laws about private mortgage insurance that are meant to protect homeowners and save them money.
The rules for private mortgage insurance can be hard to understand, just like many other parts of buying a new home. Here are some answers to questions that are often asked about PMI to help you understand it better.
Who must pay for PMI?
Most lenders require private mortgage insurance from home buyers who put down less than 20% of their home's total value or who borrow more than 80% of their home's total value. This is not, however, a hard and fast rule. Many lenders are making it easier for people who have good credit or who meet other requirements to get PMI.
What is the cost of PMI?
The premiums for private mortgage insurance are usually about.5% of the total amount of your loan. The PMI premium for the first year on a $100,000 mortgage will be about $500. For a $200,000 mortgage, the first year's premium will cost about $1,000. Since your premiums are based on how much you still owe on your mortgage, they tend to go down every year.
When do I need to pay the PMI premiums?
Most lenders want you to pay the first year's premium when you close, so don't forget to add it to your closing costs. In the following years, you'll pay it along with your monthly mortgage payment.
Do I have to pay PMI until I pay off my mortgage?
No. The length of time you have to keep PMI varies by state and lender, but you can usually get rid of it when your home is worth between 20% and 25% more than what you owe on it. The actual PMI percentage depends on your state's rate of mortgage defaults. Usually, there are also other requirements, like not being late on payments in the year before you ask for cancellation and not having any other mortgages or liens on your property.
How do I cancel my PMI?
Under the terms of the HPA, your lender must automatically cancel your PMI when you've paid down your mortgage to 78 percent 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 up to date when you reach 78 percent. If the mortgage was a high-risk loan, you can get to 77 percent equity.
What do I need to know from my mortgage lender?
When you close on a house, you need to know:
- The last day you can ask to get rid of PMI
- when your PMI will end without you doing anything
Once a year, you have to be told:
- your right to get rid of or cancel your PMI
- A phone number or address to call to find out when you can cancel your PMI
When your PMI is cancelled, you need to know:
- Your private mortgage insurance (PMI) has been cancelled, and you no longer have it.
Your private mortgage insurance premiums are no longer due.
All of this means that when you look into buying a home, you should be careful about PMI. Do your research and figure out what will work best for you.
