Private Mortgage Insurance - An Introduction
Homeowners who put down less than 20% of the purchase price of their home are probably paying for something called private mortgage insurance (PMI). Although PMI payments can run several hundred dollars a month, most homeowners probably don't know they have PMI, what it's for and when they can cancel it.
(a) What is PMI?
Private mortgage insurance is "default" or "foreclosure" insurance which a lender requires to insure against the risk of a "less than 20% down" loan going in default. The theory is that a borrower who puts less than 20% down has a greater risk of defaulting. If there is a foreclosure sale, there is a risk that the home might not sell for enough to cover the outstanding loan balance. PMI covers the lender in case the sale proceeds are not enough to cover the outstanding loan amount.
PMI is not homeowner's insurance (also known as "hazard" insurance) which protects the borrower if the home or its contents are damaged and may also provide liability coverage. PMI is also not "mortgage insurance" (also known as "credit insurance") which may pay off the balance on your mortgage loan if you die or are disabled. With PMI, the borrower pays the premium but the lender gets the benefit.
PMI premiums are usually paid monthly at the same time as your mortgage payment. As a very general rule, PMI costs about .25% to .75% of the loan amount. For every $100,000 borrowed, expect to pay PMI premiums of $20 - $60 per month. The cost varies depending on such things as the type of loan (fixed vs. adjustable rate) the length of the loan (15 or 30 years) and other factors.
(b) How Long Will I Have to Keep Paying for PMI?
If your loan was entered into on or after July 29, 1999, PMI may be cancelled under certain circumstances.
- Borrower Termination. If you have 20% equity in your home based on its "original value", you can request that your PMI be cancelled. ("Original value" means the lesser of the purchase price or the appraised value at the time of purchase.)
For borrower cancellation, you must: (1) submit your request in writing; (2) have a "good payment history;" (3) be current on your loan payments; and (4) satisfy any lender request for proof that the property has not declined below its original value, and the mortgage is not encumbered by any junior liens.
"Good payment history" needs explaining. This means you must not have made a mortgage payment 60 days late (or more) during the 12- month period beginning 24 months before you request cancellation; or made a mortgage payment 30 days late (or more) during the 12- month period before you request cancellation.
- Automatic Termination. PMI automatically terminates on the day you have 22% equity in your home (based on its original value) and you are current on your loan payments.
(c) Conclusion - Keep on Top of PMI.
In today's housing market, more people than ever have bought homes with less that 20% down and consequently, more people have PMI. You don't need to wait years until you have paid down your mortgage to the point that you have 20% equity. You may have made some home improvements or your home may have just appreciated in value. Be proactive. If you think you have 20% equity or more, ask your servicer if you can cancel PMI and make sure they don't impose conditions for cancellation that are not required by law. Even if you forget to ask for PMI to be cancelled, make sure it is automatically cancelled when you have 22% equity.