What Is PMI?

Answer:
PMI stands for Private Mortgage Insurance. This

is extra insurance for the lender that the bank will require the borrower to purchase when the proposed mortgage is more than 80% of the home’s value. Buyers who put down less than 20% for a down payment on their home are usually required to purchase PMI.

PMI is important for the mortgage industry because it protects the lender against loss if the borrower should default on a loan, and it also allows buyers with lower levels of cash to have access to a mortgage and the opportunity to own a home. This insurance allows a borrower to purchase a home with as little as three to five percent down. This allows a borrower to purchase a home many years earlier than it would be possible if they had to save for a large down payment first.

The Homeowner’s Protection Act (HPA) of 1998 required lenders to provide disclosures concerning PMI for mortgages. The HPA also added provisions for borrower requested cancellation and automatic termination of PMI. Before this law, most lenders allowed the consumer to drop PMI if they had a good payment history once the loan balance was paid down to 80% of the home value. However, the customer had to request the cancellation, and many did not know that they could. Many times, the customer didn’t keep track of their balance and didn’t know that this option was possible. The premiums for PMI can range from $250 to $1,200 per year, and this expense can add up quickly. However, this new law does not apply to VA or FHA government guaranteed loans. There are also different requirements for loans that are considered to be high risk.

In order for a loan to be considered to be a residential mortgage transaction, it must meet four requirements: a mortgage or deed of trust must be created or retained, the property that secures the loan must be a single family dwelling, the home must be the primary residence of the borrower, and the purpose of the loan must be to finance the purchase, initial construction, or refinance of the home.

Under the HPA, borrowers can request that PMI is dropped off when the balance reaches 80% of the original purchase price or appraised value, whichever is lower. You also need to have a good payment history, with no 30 day late payments in the last year, and no 60 day late payments in the last two years. Also under the new law, lenders are required to automatically drop off PMI when the balance reaches 78% of the original sales price of the home. This must be dropped within 30 days of reaching this level. For high risk loans, lenders need to drop PMI with the balance reaches 77% of the original purchase price as long as the loan is current.