What is Private Mortgage Insurance (PMI) and How Can I Avoid It?

Private Mortgage Insurance Sheet

 

Private Mortgage Insurance AKA PMI, is an insurance policy which protects the issuer of a home loan against default by the borrower. It is typically required on home loans in which the down payment is less than 20% of the appraised value of the property which secures the loan. The exception here is FHA loans which require a similar type of mortgage insurance. FHA loans require a mortgage insurance premium that is issued through the Mutual Mortgage Insurance Fund therefore, this is not “Private Mortgage Insurance” in the strict sense of the word. Additionally, FHA requires two types of premium. Upfront Mortgage Insurance Premium and an Annual Mortgage Insurance Premium which is divided into twelve monthly payments.  In most cases, FHA loans require Mortgage Insurance regardless of the amount of down payment. For a full matrix and explanation of the different scenarios, you can view and download the official document, called a Mortgagee Letter, here.

 

How is PMI Typically Calculated?

Private Mortgage Insurance is calculated based on a few factors which determine the level of risk to be insured. The primary elements that impact the cost of PMI are as follows:

  • Loan To Value ratio
  • Applicant’s Credit Score
  • Type of Property
  • Type of Loan

There are other factors which influence the rate and how it is paid. There is borrower-paid mortgage insurance as well as lender-paid mortgage insurance. The latter is basically built into the mortgage rate, which has some advantages. There are also options on how you pay your mortgage insurance. Single upfront premium or monthly payments. In addition, there are loan programs and lender variations on coverage requirement. For instance, one loan program with a lender may require 12% mortgage insurance coverage, a similar program with another lender may require 18% coverage. The rates on those two variations will have a variance in rate and payment.

 

As you can see the subject of mortgage insurance, as is the case for all types of insurance, is not simple or easy. If you truly want to find out an exact scenario for your case, contact a qualified lender who can guide you through the process and your options. If you’d like to do your own due diligence and get familiarized with the intricacies of PMI, you can visit one of the largest mortgage insurers online, MGIC. They have an extensive library of educational resources.

 

Let’s look at a real-world example so that at least you can have some idea of how PMI is calculated: 

Let’s say you are purchasing a home priced at $250,000 and you only have 10% down or $25,000. Based on the most common type of mortgage insurance offerings,  and based on MGIC rates. For a fixed rate mortgage with a FICO score of 760 or above, standard Fannie Mae loan, the monthly payment would be based on a rate of .28% and would be $53 per month.

 

How Can I Avoid Paying PMI?

Don’t want to pay Mortgage Insurance? There are some options available.  There are ways to structure a loan as well as some types of loans that don’t require mortgage insurance. One of the simplest ways to avoid PMI, of course, is to come up with 20% down and get a conventional loan. If you are unable to do that, let’s explore some ideas to fund that additional 10% down payment:

 

  • Tap into your retirement plan. Retirement plans such as 401Ks allow you to borrow against the balance of your account. Withdraw enough to complete the 20% down. Yes, you will have to make payments on that retirement plan loan however, the payment will be smaller and you will be paying yourself the interest, adding to your retirement account balance along the way.

 

  • Get a gift. If you have family who can gift you the balance of the 20% downpayment, you can avoid PMI and gifts don’t have to be paid back.

 

  • Structure your loan as an 80-10-10 AKA PiggyBack loan. This is a very practical option for borrowers with great credit. You will need a FICO score of at least 760 in most cases, however, check with your lending professional as you may be able to find programs available with lower FICO scores.

 

  • Have you served in the military? A VA loan may be the perfect loan. VA loans do not require monthly mortgage insurance although there is a “VA Guaranty Fee” which is a form of insurance. This is normally financed into the loan and in some cases, you may be exempt if you have a service-related disability.

 

  • Physician Loans. If you are a medical doctor, you may be able to qualify for special financing for doctors. These loans require no down payment AND do not carry the burden of PMI either. Although rates may be slightly higher, this may still be a great option for you.

 

  • Credit Union Loans. Check with your credit union. A small number of these offer mortgages with no PMI.

 

When Can I Stop Paying PMI On My Mortgage?

The question everyone with PMI wants an answer to; How can I get rid of PMI?! The answer is not so simple if you consider all the different types of loans with PMI someone could have. Let’s take a look at the various loans which carry PMI and how a borrower may be able to cancel it, or find another way to get out of it.

  • PMI on conventional loans- In most cases, you can get rid of PMI on a conventional loan once the Loan To Value Ratio reaches 80% or below based on the current value of the property. Typically,  the borrower has to get an appraisal and request that it be removed. The one caveat is; Many MI insurance policies, especially those that are monthly premium payment, have a minimum period during which the borrower has to have a policy in place and be paying for it. Check your particular MI policy.  In most cases, borrowers who pay down the principal balance to 78% OF THE ORIGINAL appraised value at acquisition time, will have the PMI automatically removed by the servicer. Most of the time you don’t even have to request it, servicing departments can easily figure out when the borrower will reach that LTV based on the payment schedule, an alert gets put in place and it will trigger at the appropriate time.

 

  • Mortgage Insurance on FHA Loans – Figuring out when you can, or even if the loan is eligible to have Mortgage Insurance removed, depends on a few factors. The three primary elements that determine whether or when you can eliminate the insurance are; When the FHA case # for the subject loan was issued and the term of the loan in years. Additionally, the initial Loan To Value ratio also plays a part in this matter. For a full matrix, you can view this detailed explanation on the subject.

 

  • The one solution to get rid of any type of Mortgage Insurance – The long and short of it: Refinance. Plain and simple, if you have the equity to refinance out of FHA or a conventional loan where you are still paying PMI, just refinance the loan and get a no PMI loan.

 

Is PMI Tax Deductible?

Another hot topic is the deductibility of mortgage insurance premiums on your income tax return. As of 2019 and the foreseeable future, for loans originated on or after December 15th, 2017 the deduction of premiums has been reduced to loans up to $750,000 for single taxpayers and those who are married and filing a joint return. $375,000 for those who are married and filing separately. Consult your tax preparer for full details. Taxpayers with loans originated before Dec. 15, 2017 can still take advantage of the deduction on mortgages up to $1M (One Million Dollars).

 

Summing it all up

Some would say that PMI is a “necessary evil” which some home buyers have to endure. The reality is; Mortgage Insurance provides a way for those who want to become homeowners, to do so even if they lack the hefty 20% down payment and have no other choice such as a VA loan. It is a perfectly acceptable vehicle to use to invest in that first home so you can get your foot in the door. The great news is, there are multiple ways you can get rid of it once you have gained some equity.

 

At Streamline Mortgage Solutions, we have experienced and knowledgeable mortgage professionals who will explore all your options for mortgage insurance premiums and rates as they vary. You can call us at 407-898-4477 or email us at BZIMEL@STREAMLINEFLORIDA.COM.