Private Mortgage Insurance (PMI)
How PMI can help you buy a home
The average cost of buying a home goes up each year, making it more difficult for first time home buyers to accumulate a traditional 20% down payment. Move-up buyers struggle to find down payment funds, too, especially if they haven't been in their current home long enough to see a significant increase in equity.
Thank goodness there are plenty of loan choices for home buyers who do not have a large down payment.
FHA Home Loans
Securing an FHA loan is one way to move in without a large downpayment, but loan caps are in place and they vary depending on where you live.
VA Loans
Another option is a VA loan, where no downpayment is needed at all, but you must be a veteran of the US armed forces to qualify.
Other Programs
Other loan programs may also be available to you. Ask your lender which ones you qualify for.
Private Mortgage Insurance
One home buying aid that nearly everyone can use is Private Mortgage Insurance, or PMI. This special insurance protects the lender if you default on your home loan. It makes it possible for you to purchase a home with as little as 3-5 % down.
Here's How PMI Works
- You have a 5% downpayment.
- The lender wants to finance 80% or less of the home's value, since studies show that buyers who put less down are more likely to default.
- The lender secures a private mortgage insurance policy for you and closes on the loan. You pay for the PMI policy at closing or (most often) you pay a fee with each monthly loan payment.
- If you default, the lender receives the 15% you did not pay at closing.
PMI payments can be significant, so if you can avoid paying private mortgage insurance, that's great.
- You might be able to get a second loan for the downpayment, but the extra payment will affect your debt to income ratio, which in turn will affect your home buying power. The monthly payment might be more than the PMI would have been.
- Use a down payment gifting program, where the seller indirectly gives funds to help buyers make down payments.
Do PMI payments ever go away?
Yes, but steps to remove it differ depending on when you bought your home.
Getting rid of the private mortgage insurance payment
There are ways to eliminate your PMI, but the method you must use depends on when you purchased your home.
Homeowner's Protection Act of 1998
This law established rules for automatic termination and borrower cancellation of PMI on home mortgages. The law applies to a many residential mortgages signed on or after July 29, 1999 , including refinances. It does not apply to government-insured FHA or VA loans or to loans where the lender paid for the PMI. Ask your lender if your loan qualifies.
- The Act calls for automatic termination when you reach 22% equity in your home (based on the original property value).
- Your mortgage payments must be current, and you must not be considered a "high-risk" for default.
- The PMI may continue if you have a poor payment history or if you have placed other liens on the property. Your lender can tell you more about the specifics.
Other provisions in the law,
- Borrowers must be told at closing and once a year about PMI termination and cancellation laws.
- Mortgage servicers must provide you with a telephone number where you can call for information about termination and cancellation of PMI.
- Lenders are obligated to tell borrowers who are not covered under the new law about the termination or cancellation rights they may have.
No matter when your loan was signed, you can ask to have the PMI canceled once you exceed 20% equity. You might also be able to cancel the PMI if you can show proof that your home has increased in value, but lenders often have a minimum wait time before they will accept such evidence--typically two years.
Don't hesitate to ask your lender as many questions as necessary to help you understand every aspect of PMI. It's a great tool when used wisely.
