Mortgage Basics

Private Mortgage Insurance

What is Private Mortgage Insurance (PMI)?

On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage. Sometimes you may need to pay up to 1-year's worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options.

How does PMI work?

PMI companies write insurance policies to protect approximately the top 20% of the mortgage against default. This depends on the lender's and investor's requirements, the loan-to-value ratio, and the type of loan program involved. Should a default occur the lender will sell the property to liquidate the debt, and is reimbursed by the PMI company for any remaining amount up to the policy value.

Could obtaining PMI help me qualify for a larger loan?

Yes, it will help you obtain a larger loan, here’s why. Let's say that you are a family with $42,000 Annual Gross Income and monthly revolving debts of $800 for car payment and credit cards, and you have $10,000 for your down payment and closing costs on a 7%-interest mortgage. Without PMI the maximum price you can afford is $44,600, but with PMI covering the lender's risk you now can buy a $62,300 house. PMI has afforded you 39% more house.

How much does PMI cost?

PMI costs vary from insurer to insurer, and from plan to plan. Example: A highly leveraged adjustable-rate mortgage requires the borrower to pay a higher premium to get coverage. Buyers with a 5% down payment can expect to pay a premium of approximately 0.78% times the annual loan amount, $92.67 monthly for a $150,000 purchase price. But, the PMI premium would drop to 0.52% times the annual amount, $58.50 monthly if a 10% down payment was made.

How is PMI paid?

PMI fees can be paid in many ways depending on the company used:

Borrowers can choose to pay the 1-years premium at closing, and then an annual renewal premium is collected monthly as part of the house payment.
Borrowers can choose to pay no premium at closing, but add on a slightly higher premium monthly to the principal, interest, tax, and insurance payment.
Borrowers who want to sidestep paying PMI at closing but don't want to increase their monthly house payment can finance a lump-sum PMI premium into their loan. Should the PMI be canceled before the loan term expires through refinancing, paying off the loan, or removal by the loan provider, the borrower may obtain the rebate of the premium.

How does the buyer apply for PMI?

Typically the buyer covers the cost of PMI, but the lender is the PMI company's client and shops for insurance on behalf of the borrower. Lenders usually deal with only a few PMI companies because they know the guidelines for those insurers. This can be a problem when one of the lender's prime companies turns down a loan because the borrower doesn’t fit its risk parameters. A lender might follow suit and deny the loan application without consulting a second PMI company which could leave all parties in an undesirable position. The lender has the difficult task of being fair to the borrower while shopping for the most effective way to lessen liability.

Cancellation of PMI

The Homeowners Protection Act of 1998 established rules for automatic termination and borrower cancellation of Private Mortgage Insurance (PMI) for home mortgages. These protections apply to certain home mortgages signed on or after July 29, 1999 for the home purchase, initial construction, or refinance of a single-family home. It does not apply to government-insured FHA or VA loans, or to loans with lender-paid PMI.

With certain exceptions (home mortgages signed on or after July 29, 1999) your PMI must be terminated automatically when 22% of the equity of your home is reached, based on the original property value and if your mortgage payments are current. It can also be canceled at your request with certain exceptions, when you reach 20% equity, again based on the original property value, if your mortgage payments are current.

Exceptions:

If your loan is "high risk"
You have not been current on your payments within the year prior to termination time or cancellation
If you have other liens on your property

Ask your lender or mortgage servicer for information about these requirements. If you signed your mortgage before July 29, 1999 you can request to have the PMI canceled once you exceed 20% home equity. But, federal law does not require your lender or mortgage servicer to cancel the insurance.

What is the history of PMI?

The Private Mortgage Insurance industry originated in the 1950's with the first large carrier, Mortgage Guaranty Insurance Corporation (MGIC). They were referred to as "magic" as these early PMI methods were deemed to "magically" assist in getting lender approval on otherwise unacceptable loan packages. Today there are 8 PMI underwriting companies in the United States.

PMI companies

Amerin Guaranty Corporation

303 East Wacker Drive, Suite 900

Chicago, IL 60601

Tel: 800-257-7643

Fax: 312-540-0564

PMI Mortgage Insurance Company

601 Mongomery Street

San Francisco, CA 94111

Tel: 800-288-1970

Fax: 415-291-6175

Commonwealth Mortgage Assurance Company

1601 Market Street

Philadelphia, PA 19103-2197

Tel: 800-523-1988

Fax: 215-496-0346

Republic Mortgage Insurance Co.

P.O. Box 2514

Winston-Salem, NC 27102-9954

Tel: 800-999-7642

Fax: 919-661-0049

G.E. Capital Mortgage Insurance Corporation

P.O. Box 177800

Raleigh, NC 27615

Tel: 800-334-9270

Fax: 919-846-4260

Triad Guaranty Insurance Corp.

P.O. Box 25623

Winston-Salem, NC 27114

Tel: 800-451-4872

Fax: 919-723-0343

Mortgage Guaranty Insurance Corporation

P.O. Box 488

Milwaukee, WI 53201

Tel: 800-558-9900

Fax: 414-347-6802

United Guaranty Corporation

P.O. Box 21567

Greensboro, NC 27420

Tel: 800-334-8966

Fax: 919-230-1946

Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your application.

Your rights under the Fair Credit Reporting Act:

You have the right to receive a copy of your credit report. The copy of your report must contain all of the information in your file at the time of your request.
You have the right to know the name of anyone who received your credit report in the last year for most purposes or in the last two years for employment purposes.
Any company that denies your application must supply the name and address of the CRA they contacted, provided the denial was based on information given by the CRA.
You have the right to a free copy of your credit report when your application is denied because of information supplied by the CRA. Your request must be made within 60 days of receiving your denial notice.
If you contest the completeness or accuracy of information in your report, you should file a dispute with the CRA and with the company that furnished the information to the CRA. Both the CRA and the furnisher of information are legally obligated to reinvestigate your dispute.
You have a right to add a summary explanation to your credit report if your dispute is not resolved to your satisfaction.