Monday, February 26, 2007

PMI Explained

PMI, or Private Mortgage Insurance, has been around for a while. But it used to be reserved for people with less-than-stellar credit ratings. In its early days, PMI was a mark of shame of sorts, the scarlet letter that home buyers carried with them and averted their eyes when discussing the topic.


In recent years, PMI has become the norm rather than the exception. According to the National Association of Realtors's 2006 Profile of Home Buyers and Sellers, the typical first-time purchaser bought with just 2 percent down while replacement home purchasers bought with 16 percent down. While PMI is often associated with first-time buyers, the reality is that even home buyers who are 'trading up' into a larger or more expensive home are carrying PMI.


As the term PMI gets bandied about with ever-increasing frequency, many potential home buyers might not feel comfortable asking about the particulars. Simply put, PMI is insurance for the lender, usually paid for by the home buyer, when the buyer has less than 20% equity in the home at the time of purchase.

So if you have one of those creative 80-20 loans, you've got PMI. If you did anything other than a conventional 20% or more down payment, you've most likely got PMI. Some home buyers sidestepped PMI, but the trade-off was to pay a higher interest rate.


PMI used to be incredibly difficult to do away with. Borrowers were responsible for keeping track of their loan ratio, and then had to contact their lenders to have PMI removed. Buyers who did not keep track of the numbers continued to pay into PMI, even when they surpassed the investment requirement that would release them from the additional payment.

Loans secured after July 29, 1999 have added protection with automatic cancellation or termination of the PMI once the balance is below 80 percent of the original value. This is known as "Automatic Termination", and typically kicks in when you accrue 22% equity.

But your lender is certainly not keeping track of your home's natural appreciation. So if you are in an area that has seen strong appreciation over the past few years, or even if you have made improvements to your home, you might already be at or beyond the necessary threshold to cancel PMI.

David Porter points out that, in the case of "Borrower Requested Cancellation", home owners should be aware of the following restrictions:

May be requested once you pay down your mortgage to the point that it equals 80% of the original purchase price or appraised value of your home at the time loan was obtained, which ever is less.
No 30 day late payments on your mortgage in the last year.
No 60 day late payments on your mortgage in the last two years.
Your mortgage servicer may require an appraisal to evidence the current value.
Having a second mortgage will likely foul up your request.

PMI MYTH: My real estate taxes will increase if I have my home reappraised.

Many people wonder if having their lender reappraise their homes will trigger an increase in property taxes. The fact is, the A mortgage lender's professional appraisal of your home has absolutely nothing to do with your property tax assessment....Only the local tax assessor -- not a licensed appraiser hired by your mortgage lender -- can reassess your property.

As more and more people are faced with increased mortgage payments from adjustable rate mortgages, getting rid of PMI could prove to be an incredibly helpful tool for home owners.


Derek Guyer said...

Good post. A lot of investors, including myself at times, forget to add this into their monthly expenses when running their cash flow. While I understand it, it's still quite annoying

TheREForum said...

Thanks, Derek. I agree, a lot of investors overlook that expense. But worse, I think long-term owners acclimate to it, and then forget what a useless expense it can be in many seriously appreciated markets.