8 Private Mortgage Insurance Facts Everyone Should Know

Private mortgage insurance (PMI) protects the lender if you default on your loan.


How Private Mortgage Insurance Works

As the cost of buying a home increases each year, first time homebuyers struggle with saving the traditional 20% down payment. Even move-up buyers struggle to save the money for their next home purchase as costs rise. PMI gives these potential homeowners the ability to purchase a home with less money down or out-of-pocket.

Here is how it works.

  1. PMI allows for borrowers with only a 3% to 5% down payment to purchase a home.
  2. PMI protects the lender against borrowers who default on a loan, since it is common for those with less than 20% down payment to default. If you default, then the lender will receive the remainder of 15% that you did not pay.
  3. The borrower usually has to pay for the private mortgage insurance and it is included in the mortgage payment.
  4. PMI premiums are usually a percentage of the total mortgage and may increase the amount of the monthly mortgage payment.
  5. PMI is not the same as homeowner’s insurance, which only protects the homeowner’s property for specific damages. PMI only protects the lender, not the homeowner.
  6. MIP (Mortgage Insurance Premium) is a similar insurance program to PMI, but is obtained through the US government.
  7. You can eliminate your PMI payment, depending on when the home was purchased.
  8. Some lenders will offer a first mortgage loan at 80% of the original loan amount and a 20% second mortgage as an option instead of private mortgage insurance.
The Homeowner’s Protection Act of 1998

The law covers various residential mortgages, including refinances, signed on or after July 29, 1999, and it establishes the rules for an automatic termination of PMI and/or a borrower cancellation. However, this does not apply to the government insured FHA or VA mortgage loans as well as those loans where the lender paid for the private mortgage insurance.

When the borrower‘s home reaches around 22% equity, automatic termination of PMI takes place, according to the Act. The borrower cannot be considered “high risk” for default and all mortgage payments must remain current. In the event that the borrower has poor payment history or has placed liens on their property, PMI can continue. The lender can go into specifics about this, so be certain to ask.

One of the provisions of the Act is that all borrowers with PMI have to be informed yearly about the laws of PMI termination or cancellation. The mortgage servicers must give borrowers a telephone number where they can call for information in regards to private mortgage insurance termination or cancellation, and lenders are also obligated to inform borrowers not covered under this Act about their rights regarding termination or cancellation of PMI.

Once a borrower reaches the 20% equity amount of their home’s value, they can ask to cancel their private mortgage insurance, no matter when they signed the loan. It is also a possibility to cancel PMI if the borrower can prove that their home’s value has increased, but typically, lenders have a two-year waiting period before this can happen.

Always ask your lender questions regarding PMI.

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