PMI (Private Mortgage Insurance) Explained
PMI, also known as private mortgage insurance, can be a complicated subject to understand. For those who plan on obtaining a mortgage license in the near future, it is essential that you know what PMI is, why it’s necessary and who needs it.
What is Private Mortgage Insurance?
Many consumers who want to buy a house might not enough money to make a 20 percent down payment. Those who are approved with a smaller down payment are normally required by lenders to enroll in a private mortgage insurance program.
This program acts as a type of insurance policy for lenders should the borrower default on the loan. The premium is normally calculated based on a percentage of the total amount of the loan, which is then divided into 12 equal monthly payments. Most PMI policies are structured to be based on less than 1 percent of the total mortgage amount.
Once the loan-to-value ratio for the mortgage stands at 80 percent, the lender is required, by law, to cancel the private mortgage premiums.
Is PMI for Everyone?
Private mortgage insurance is not for everyone. If a borrower must purchase a home with less than 20 percent down, they might not have a choice and must be enrolled in a PMI plan. If a borrower has the means to get a 20 percent down payment but is considering a purchase with less, they should consider the fact that private mortgage insurance adds an additional monthly payment, and can be a hassle to cancel when the LTV ratio has reached the proper percentage point.
An alternative to private mortgage insurance in government mortgage insurance. Individuals who don’t have 20 percent down on a home can apply for an FHA loan which, while it requires government insurance, the premiums are based on a set percentage. FHA mortgage insurance may last the life of the loan, resulting in an increase in overall loan costs for the borrower.
What Mortgage Brokers Need to Know
For mortgage brokers that plan on catering services to individuals with smaller down payments, extensive knowledge of PMI plans is essential. Most consumers and many brokers aren’t familiar with little known facts that pertain to PMI premiums and how they effect a mortgage:
Cancellation Policies– Government regulation set in 1998 states that mortgage insurance purchased through a government program or through the lender itself is not subject to the automatic cancellation policies.
Home Value and Cancellation– If value of your home has increased drastically and you believe the LTV has reached the appropriate level, you can request that your lender remove the PMI premiums. This only applies to mortgages more than two years old and the outcome is not guaranteed.
Disclosures– While a mortgage broker is not a lender, in order to protect themselves from lawsuits and government fines, he or she should always disclose information about private mortgage insurance during the application and closing processes.