Primary mortgage insurance (PMI) is insurance required by the financial institution lending mortgage money to homebuyers who are unable to meet certain conditions. PMI protects the lender in the event a homeowner defaults on the mortgage loan and can no longer make monthly mortgage payments. Typically, PMI premiums are folded into the monthly mortgage payment, and the premium can be eliminated once the homeowner meets the conditions set by the lender.
When Do Lenders Require PMI?
Typically, lenders want prospective homeowners to have a financial stake in their homes. In most cases, they expect buyers to make a down payment of 20% of the purchase price of the home in order to waive the requirement for carrying PMI.
How Can I Avoid, or Eliminate, the Cost of PMI?
The cost of primary mortgage insurance can be eliminated as homeowners pay down their mortgages and reach that 20% ownership threshold. Once the homeowner has paid the principal down enough to assume a 20% ownership stake in the home, he or she can request that the lender drop the need for PMI.
Are There Other Ways I Can Avoid Paying PMI Each Month?
One strategy is to take out a smaller loan, typically at a higher interest rate, to meet that 20% ownership threshold lenders like to see in their mortgagees. This is sometimes called a “piggyback” loan because it piggybacks on the mortgage loan.
Obtaining a piggyback loan to reach the 20% down payment can eliminate the need to secure PMI coverage, though the new homeowner still makes payments on both the mortgage and piggyback loans.
To obtain a piggyback loan, lenders usually want to see a quality credit history of steady payments, no negative activity (like a bankruptcy filing), and a clear understanding of how the homeowners will make those monthly payments on both the mortgage and piggyback loans.
Terms differ from lender to lender, so visit your mortgage specialist at your local bank to discuss if it will be possible to avoid the requirement to obtain mortgage insurance.1
Does PMI Ever Go Away By Itself?
It does if you have patience and time. In 1998 the Homeowner’s Protection Act became law to protect homeowners from the unnecessary expense of PMI.2
Under the Homeowner’s Protection Act, lenders must eliminate the requirement to maintain PMI when the lender’s financial stake in the home reaches 78% according to the original amortization schedule – the schedule of how much you pay each month in interest and principal.
When the original amortization schedule shows the lender’s ownership of the home has reached 78%, by law the lender must eliminate the requirement to maintain PMI – as long as certain conditions are also met:
- The home must be the homeowner’s primary residence.
- Automatic termination of PMI is based on the original amortization schedule, not on how quickly you pay down the principal portion of your mortgage.
- Federal Housing Administration (FHA) loans are not covered by the Homeowner’s Protection Act. PMI is required for the life of the loan on all FHA 30-year fixed mortgages.
- The homeowner may be required to wait from between two to five years after obtaining a mortgage to request the elimination of PMI.
- Lenders are likely to approve homeowners’ requests to eliminate PMI based on the appraised value of the home at the time of purchase, not on what the property is worth today.
- Lenders can deny a request to eliminate PMI based on late payments, and changes in household income.
- If property value decreases, the lender may still view the mortgage as a higher-risk loan, and require the homeowner to maintain PMI.
Primary mortgage insurance can be a good solution for would-be homebuyers who lack the 20% down payment lenders want to see before granting a mortgage loan.
A good starting point to learn about obtaining a mortgage, and whether you’ll be required to obtain PMI coverage, is with your bank’s mortgage specialists. These professionals can provide the answers to your mortgage and PMI questions, and help structure the most cost-effective loan package option for you and your family.
Talk to a mortgage professional at Nevada State Bank to help you become a savvier home buyer, and perhaps save money each month on housing costs.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.
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