Private Mortgage Insurance (PMI) is one of the most common yet most widely misunderstood concepts in mortgage lending today - at least from the borrower’s viewpoint. When many borrowers hear “mortgage insurance,” they tend to thing hey - that’s great! I’ll be protected in case I can’t pay my mortgage!” However, this mortgage insurance is not in place to protect borrowers. Rather, it’s put into place to protect lenders.
See, in situations where borrowers are unable to put down 20 percent or more for a home purchase, lenders tend to get a bit hesitant to lend - at least with out a hedge against their bet. Experience has shown them that borrowers with less than 20 percent down tend to default on their loans more often. So, lenders require those borrowers to pay a monthly fee to cover an insurance policy that in turn, protects - or insures - them in case you can’t meet your financial obligations.
How Private Mortgage Insurance (PMI) Breaks Down Here’s How PMI Works
Say you’re getting an mortgage and are prepared to put 5 percent down on your home. The lender requires any borrower putting down less than 20 percent to pay for an insurance policy that protects them in case the borrower becomes unable to pay on the loan. In this scenario, you’ll likely pay a set fee per month as part of your mortgage payment to cover this insurance.
Should you at any time default on your mortgage loan, the lender would benefit by receiving the 15 percent you did not pay as part of your down payment at closing. Remember - 80 percent. That’s the magic number lenders feel comfortable lending without requiring PMI.
Ending Your PMI Payments
The Homeowner’s Protection Act of 1998 requires lenders to automatically suspend PMI billing once you’ve attained 22 percent equity in your home. However, once you have paid on your mortgage to a point where you have the required 20 percent accumulated, you can and should request that the PMI fees you pay each month be suspended.
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- Categories: Mortgage Terms
Comments
7 Comments so far
Mark
What i find frustrating, is that banks are no longer looking into the applicant to give out a loan. With this economy and the failing housing markets, if a person has liquid and assets but wants to put down the 10 % on a new home or vacation home they should still be considered……They need to look into the borrower more….The banks were greedy in the past, get bailed out and still give people and small business a hard time who have the credit, assets and plans to carry out the loan, but it is unfortunate that the major consideration is “how much down”
DebtFree
Someone who doesn’t have a 20% downpayment, shouldn’t be buying a house. Simple as that.
In addition to that 20%, they’ll also need money for maintenance, unforeseen repairs, unexpectedly hot/cold weather (high utility bills), and funding of retirement planning/accounts.
Pete
I have bought 2 houses and have not had 20% down either time.
Thank god morons like debtfree don’t run the world.
Will
The debtfree jerk who thinks that only the people who have 20% down should get a loan is just another in the long line of corporate geeks who probably took the bailout money not long ago. Really debtfree. Why don’t you think about such a stupid statement before you throw it out there like that. Did you ever think that there were responsible people out there that made decent money that just didn’t have 20% down? What did you want them to do, wait for your blessing to buy?
steve
Just bought a second house in April with BOA no closing cost loan that required only 15% down. Have great credit and have been paying mortgages for 32 years (4 different houses), they made me jump through hoops to get the mortgage that was delayed by the bank many times. They sent a notice that the mortgage will be handled by a BOA subsidiary starting 11/16 and starting in May, because ,I guess, I have to requalify I will be charged an additional $55+ a month for PMI unless I can prove to them that the cost of the house has not gone down! The monthly charge of $55+ will protect the poor bank for the $4000 that is needed to bring my initial down payment to 20%. Apparently there is no regulation in that insurance field, they can charge whatever they want. I have to get an appraiser to show the value of my home or get to pay 16.5% of the value of the insurance per year. I’m going to pay the $4000 (I’m lucky I have it), they got in trouble shoving loans at people who shouldn’t have them now we continue to pay so they can get their bonuses.
Kevin Sandridge
The decision to buy a home is a highly personal one. Many home owners today who are long into their mortgages - paying on time as agreed - were able to get into their homes thanks to FHA home loans - or other programs that gave them a break on their down payment amount.
Kevin
nice article… quite informative…