The pros and cons of private mortgage insurance

Private mortgage insurance – commonly known as PMI – has been around in some form for quite awhile, helping to put homeownership in reach for many families. It is a type of mortgage insurance, used on conventional loans, that protects the lender should a borrower stop making payments on the loan.

Lenders typically require PMI when a borrower’s down payment is less than 20 percent on conventional loans. Government backed loans have their own type of insurance programs, except for VA loans, which do not require PMI. The premium is included in the monthly mortgage payment, in addition to taxes and homeowners insurance. PMI can also sometimes be financed or paid up front in a lump sum. If paying up front, the private mortgage insurance company may offer a discount.

PMI typically costs between 0.5 percent to 1 percent of the total loan amount. For example, assuming a 1 percent PMI fee, on a $120,000 loan the borrower could pay as much as $1,200 each year, or $100 each month. Shelly Starr, mortgage loan consultant and branch manager with AmeriFirst Home Mortgage, says the PMI rate is determined by the borrower’s credit score and the amount of the down payment.

“For loans like FHA and USDA, their mortgage insurance rate is typically the same across the board,” she said. “For conventional loans it is different for every borrower. Someone with a 760 credit score will get a really good rate, while someone with a 620 may have to pay a little more.”

With the passage of the Homeowner's Protection Act (HPA) of 1998, PMI coverage cancels automatically when the borrower reaches 22 percent equity, or 78 percent loan-to-value. Prior to the passage of this act, homeowners had to request cancellation and often paid longer than necessary. Starr says although coverage terminates at 22 percent, borrowers can still request cancellation at 20 percent equity.

“You can ask to have it removed when you hit 80 percent loan-to-value, but you have to prove that value through an appraisal,” she said. “Otherwise, it will automatically drop off at 22 percent, no questions asked.”

For some homeowners, PMI can be tax deductible. For families who itemize deductions and make less than $110,000 per year, PMI is deductible.

The Consumer Financial Protection Bureau says borrowers making a low down payment can explore other options, such as an FHA, saying “other types of loans may be more or less expensive than a conventional loan with PMI, depending on your credit score, your down payment amount, the particular lender, and general market conditions.”

Because of the extra cost involved PMI can sometimes get a bad rap, but Starr says that potential borrowers need to shift their mindset and think of PMI as a good thing.

“It used to be that a lot of people did not have that opportunity to be homeowners, but PMI has enabled many buyers to get into a home when they might have otherwise not been able to,” she said. “It really is in place to help homeowners, and that is one of the reasons we have seen homeownership rates increase so much in the last 50 years.”

If you are thinking of purchasing a home and would like more information, visit the Greater Lansing Association of REALTOR®’s website at www.lansing-realestate.com for a listing of experienced area mortgage professionals.