Private Mortgage Insurance

By Robert C. Mead

Private mortgage insurance (“PMI”) comes into play when prospective homeowners wish to finance their purchase with a conventional mortgage but lack the 20% cash down payment required by Freddie Mac and/or Fannie Mae.

Statistics prove that default rates grow exponentially as the percentage down payment decreases. Mortgage insurance policies protect the lender in the event the homebuyer defaults on the loan. Typically, the cost of PMI amounts to about a half a percentage point of the loan, that is, on a $150,000 mortgage about $750 per year, or $62.50 per month.

The Homeowners Protection Act of 1998 requires mortgage insurance providers to terminate PMI coverage automatically once a homeowner’s equity (loan amount/value) has reached 22% (based on the original purchase price).  Many lenders, however, will permit homeowners to stop paying premiums once they reach 20% equity. You simply have to ask.

At the level of current interest rates in will take about twelve years for a 100% mortgage to reach 20% equity.  However, homeowners in a number of rapidly growing markets have seen prices escalate by more than 20% in a single year.  If you believe the value of your home has appreciated significantly or if you have made material improvements to the property and you are currently paying mortgage insurance, we would suggest that
you contact your lender and have your home re-appraised.  It typically costs you about $250, but it may save you thousands of dollars by eliminating unnecessary mortgage insurance payments. 

Even if your home is located in an area of modest appreciation there is a possibility that your property has already passed the magic 20% mark and you may not be aware of it. Dig out you mortgage documents and check to see if your lender put restrictions on your contract regarding PMI cancellation.  Buckeye Mortgage will be happy to review your documents for you.  If there is no restriction found, ask your investor to find out the exact month when you will be eligible to eliminate the mortgage insurance payment.  Then mark your calendar and send your lender a letter sixty days in advance requesting that your PMI be eliminated.

If you still have a number of years to go to get to 20% and you plan to remain in the home for the long term, making additional principal payments will build your equity more quickly (one extra mortgage payment per year builds 20% equity in just seven years and reduces the amortization of a 30 year loan to less than 24 years).  Again, mark your calendar and request that your PMI be eliminated when you reach the 20% threshold.     

Happily, the need for PMI has been eliminated in many cases by so-called piggyback loans, which combine a first and a second mortgage to help the borrower attain the magic 20%.