July 29th, 2017
PMI is an insurance policy (Private Mortgage Insurance) that covers part of the lender’s losses in case that you default on your home loan (as in a foreclosure). FHA (Federal Housing Administration) loans call it MI (Mortgage Insurance) but they are basically the same thing.
This type of insurance only benefits the lender. There are no benefits for the buyer, except for being able to purchase a home with a low-down payment. You should not confuse PMI with Home Owners Insurance (HOI).
HOI covers things like replacement costs in case of fire or theft. HOI is required by most lenders to cover the replacement value of the house in case of a total loss of the structure. These policies only cover the building itself, and not the value of the land.
If you are opting for an FHA loan, the government requires that you “buy in” to the government MI program. This is referred to as FHA Up-Front Mortgage Insurance Premium. The current rate for this fee is 1.75% of the loan amount — $1,750 for a $100,000 loan.
The good news is that this upfront fee is rolled into the loan amount by FHA, so it is not part of the cash to close needed.
Conventional loans do not have upfront fees. This is great but does not always translate into lower payments for the buyer. You see, unless you have a stellar credit score, your PMI payment might be larger than FHA’s MI (currently at 0.85% of the loan amount, regardless of your credit score).
If you have a conventional loan, you can ask your lender to remove PMI when your home reaches an 80% LTV (Loan to Value).
The important thing to keep in mind here is that this is 80% of the current value, not what you paid for it. So if your home went up in value since you bought it, you might be eligible to have it removed.
The second removal method is when you have paid off 22% of your loan, leaving you with a 78% LTV. The lender by law has to remove the MI from your monthly payment.
Unfortunately, the answer to this is never. A couple of years ago FHA decided to leave MI for the life of the loan, it will never go away, no matter what LTV your house has.
The only way to get rid of MI on an FHA loan is to refinance your home. On a $200K loan, this translates into a savings of $141.oo a month, quite the savings indeed.
While nobody wants to pay more, Mortgage Insurance has made home buying a real possibility for many Americans. Mortgage Insurance allows lenders to offer home loans with lower down payments and better rates.
Just keep in mind that you check your mortgage, maybe you are eligible to have it removed or maybe you can refinance, either way, you might be able to get rid of PMI.