what is a pmi and how long i should have it?

Asked by Brujito, La Puente, CA Wed Feb 24, 2010

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Steven Ornel…, Agent, Fremont, CA
Wed Feb 24, 2010
Hi Brujito,

PMI or MI stands for Private Mortgage Insurance / Mortgage Insurance. This is applied when less than 20% of the purchase price has be submitted as a down payment.

I’m going to split this answer between Non-FHA and FHA purchase financing (refinancing can be different).

To start, if we are talking about Non-FHA purchase financing there are quite a few variables (determined by the insurer) that can influence the calculation of the PMI premium. For example, MGIC has an online PMI Calculator here: http://www.mgic.com/is/html/ratefinder.html

23 different variables are utilized:

1) HFA affordability+ Code: [for a special type of loan]
2) PMI Insurance Type: [Borrower or Lender Paid]
3) Lender State
4) AUS Status [Automated Underwriting (UW) Systems provide codes based on the credit worthiness of the file]
5) FICO Score
6) Traditional/non-traditional UW Guidelines
7) First Time Home Buyer
8) Property State
9) Loan Type
10): LTV Ratio
11) PMI Premium Type
12) Occupancy Type
13) Loan Term
14) Loan Purpose
15) Base Loan Amount
16) PMI Renewal Type
17) PMI Coverage % [varies based on lender]

“Special Features”
19) Interest-Only
20) Declining Market
21) Relocation Loan
22) Unit Property
23) Mobile/Manufactured Home

RMIC is another mortgage insurer. For comparison purposes their calculator can be found here: http://rateestimator.rmic.com/


Switching gears, in the case of a FHA purchase loans the calculation is much more “simple.” FHA purchase loans require payment of an upfront mortgage insurance premium (UFMIP) equal to 1.75% of the base loan amount (which can be financed, if desired).

In addition there is a monthly PMI fee that is dependent on LTV. This monthly PMI “renews” annually based on the new base loan amount, so overtime the MI payment gradually reduces. (Cancellation of PMI for both loan types is covered below).


PMI CANCELLATION
There is an important distinction to make between Non-FHA and FHA as well. As you are probably already aware, Non-FHA loans allow for the removal of PMI once the market-based equity in the home reaches 20%. FHA loans are quite different in this respect. With FHA you will have to pay Mortgage Insurance for a MINIMUM of 5 years, and until you have paid your original LOAN AMOUNT down to 78% (not that the loan amount is 80% of current market value, which is typical for non-FHA MI removal). For all but 15-year term mortgages, you will pay MI premiums for the GREATER of five years or until the amortized loan-to-value reaches 78 percent. This "78% or 5-year Rule" before Mortgage insurance can be terminated is covered here: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/fi…

Best, Steve
1 vote
Steven Ornel…, Agent, Fremont, CA
Wed Feb 24, 2010
Hi Brujito, since I mentioned MGIC in my response below I also wanted to make you aware that since we are talking about insurance, and therefore risk, guidelines can change at any time.

Case in point:

Announced yesterday, and going into effect March 8th, MGIC will make pricing and criteria changes in response to losing market share to FHA loans and also to keep their #1 position among MI companies. The new pricing scale will use borrowers' credit scores to set premium rates with lower prices for borrowers with the best credit history and higher premiums for those with worse scores. MGIC hopes this will not only increase revenue but will also shift their business toward borrowers with FICO's above 720. For all markets and origination sources, MGIC will require a minimum of 3 credit tradelines evaluated for 12 months. Without this, the loan must meet MGIC's nontraditional credit guidelines.
http://www.mgic.com/email/uw_bulletin_01-2010.html

Best, Steve
0 votes
x, , 10021
Wed Feb 24, 2010
Brujito,
PMI is private mortgage insurance. This is a third party insurance policy to protect the bank from default on your loan. You are paying for this insurance policy for the bank. Anytime you have a loan that is at a loan to value (loan size divided by value) that is greater than 80% on a conforming loan (fannie mae or freddie mac...or a portfolio held loan), you will be required to have PMI. You will automatically be relieved of the PMI only when your loan balance drops to <78% of the original loan amount. You would have to check with your lender and PMI company (the lender can tell you who that is...typically Radian, PMI, MGIC, Genworth). There are ways to get the PMI removed earlier than waiting for the loan balance to get paid down. This is lender and PMI company specific. Some lenders/PMI companies will allow for you to get a new appraisal after 2 years of paying the premium, and if the loan to value is less than 80%, they will allow you to stop paying PMI. You would have to check with them. For example: you purchase a home for $200,000 you take a 90% loan to value loan at $180,000. You need to pay down the principal of the loan to $140,400 to have the PMI automatically stop being charged (78% of 180,000). Where the housing market is now, (very low), we are all assuming it will rebound over the next two years. Depending on the rate of appreciation, you definitely would want to track the value after two years and entertain the cost of getting a new appraisal done (typically $350 - 450).

FHA also has mortgage insurance, but it is charged on all loans regardless of loan to value, except if you take a loan term of <=15 years with the loan to value that is 80% or less. Please keep in mind that you still need to pay FHA MIP (mortgage insurance premium) if you take a 30 year loan at ANY loan to value...even if it is less than 80%...dissimilar to conventional where you don't pay PMI if you take a loan at <=80% loan to value. With the FHA MIP, you will need to pay the premium for 5 full years AND the balance is 78% or less of the original appraised value or sales price, whicever is less. There are some exceptions to this with FHA. If you have a loan to value of <=90% AND have a term that is <=15years, the FHA MIP will be cancelled when the loan balance is 78% of the original appraised value or original sales price, whichever is less and you don't need to wait 5 years.

Best thing to do is to call your servicer, the bank that you pay monthly and ask them what their policies are regarding the rempval of PMI.

Good luck. If you or any friends, family or co-workers are looking to refinance or purchase, I specialize in the Floridain and Californian markets. Please refer them over to me if you find my inforamtion helpful.

Ryan McPartland
Co-Owner/Licensed Mortgage Consultant
Primary Mortgage Group
800.339-0681 Direct
ryan@primarymortgagegroup.com
0 votes
Gerard Dunn, Agent, Chevy Chase, MD
Wed Feb 24, 2010
With less than a 20% down payment - it is a required part of most mortgage loans.

It is insurance for the lender that they will be reimbursed should the loan go into default than foreclosure.

If you stop paying on the loan - and it is sold for less then the outstanding balance - the mortgage insurer will then reimburse the lender to make them whole.

PMI is not cancelled automatically. You can ask for it to be dropped if you pay down the principal value of the loan to 70-75% of the original loan to value.
0 votes
Marita Topmi…, Agent, Indianapolis, IN
Wed Feb 24, 2010
Hello Brujito,

PMI or Private Mortgage Insurance is paid if the buyer is not making at least
20% downpayment.

An FHA borrower owes a lump sum for payment of the MIP or Mortgage
Insurance Premium if it is not financed as part of the loan. A VA mortgagor pays a funding fee directly to
the VA at closing. If a conventional loan carries PMI or Private Mortgage Insurance, the buyer prepays
one year's insurance premium at closing.

Check with your lender for details.

Hope that answers your question,

Marita Topmiller
Asso Broker
Indianapolis, Carmel, Fishers
0 votes
Raimo Kumpul…, , West Palm Beach, FL
Wed Feb 24, 2010
Private Mortgage Insurance.

Many banks require it if the LTV (loan to value) is less than 80%.

As soon as you feel that you could get rid of it, contact your bank. The bank will want to see an appraisal which shows that the value of your house is above a certain amount, relative to what you owe.
0 votes
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