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.
If you have any questions about Private
Mortgage Insurance feel free to
contact us.
