What is PMI?
If you are buying a home chances are the topic of PMI has come up, and you’ve wondered what it is. PMI stands for private mortgage insurance, and is an extra fee built into your monthly mortgage payment designed to protect lenders against foreclosure costs. The protection is provided by third-party PMI companies, which work in a way that is similar to other types of insurance companies.
PMI is different than MIP.
MIP is short for UFMIP and stands for Up Front Mortgage Insurance Protection on an FHA mortgage refinance or purchase loan. MIP is required on all FHA mortgage refinance or purchase loans and is collected up front -- whereas PMI may not be required on a mortgage whether or not it is an FHA mortgage refinance or purchase loan OR a conventional loan. Additionally, PMI is collected on a monthly basis where UFMIP is collected up front.
Not all loans require PMI?
Correct.
In fact, PMI is usually only required when the buyers contributes less than 20% of a home’s price. In a nutshell, PMI gives the lender the same type of protection they would have received if the buyer had put down more money. It closes the gap in the lack of equity and covers a lender’s losses if the home goes into foreclosure. In many cases, mortgage lenders won’t approve a mortgage without a 20% down payment, unless PMI is part of the deal.
How much PMI are you expected to pay? Well, a good rule of thumb is that the cost of your PMI increases as your down payment decreases. So if you put 15% down, your PMI will be less than if you put only 10% down.
In most cases it’s better to put down a larger down payment in order to avoid PMI, as the buyer receives no benefit from PMI. However, if PMI is necessary for the loan to be approved, it’s not a life sentence. In many cases the lender will allow PMI to be cancelled once a certain degree of equity—usually 80%—is in the home. While there are no hard-and-fast rules regarding the cancellation of PMI and the decision is ultimately up to the lender or any investors, most lenders will not require a buyer to pay PMI beyond a reasonable point.
What should you do if you have PMI but would like to cancel it?
First of all, check your lender’s policy. Some lenders require buyers to pay PMI for two years before they apply to cancel it. If you meet your lender’s criteria and believe you have paid the loan down to 80% or less of the original property value, contact your lender. In most cases an appraisal will be ordered by the lender to determine your home’s current value. The cost of the appraisal will probably be your responsibility.
There’s one other way to get rid of your PMI, and that’s to refinance your home. If interest rates are at least one point lower than your original rate, or if you are converting from an adjustable rate mortgage to a fixed rate mortgage, this may be the easiest way to get rid of PMI.
Lastly, where there are ways to get an MIP Refund (either in credit or cash depending on a number of variables), there is no such thing as an PMI Refund. Once you pay PMI each month, that money is gone -- never to be seen again.
