Mortgage Insurance

Historic Home savings bank (now Chase) at the corner of Sunset and Vine

Historic Home savings bank (now Chase) at the corner of Sunset and Vine

When your down payment is less than 20%, lenders view these loans as riskier and require “private mortgage insurance”, also called PMI.  PMI is insurance that protects the lender if you default. PMI is an additional monthly expense that doesn’t really do anything for you. Most buyers can’t wait to get rid of it.

PMI cost can vary. Use this calculator to get an idea:

http://www.goodmortgage.com/Calculators/PMI.html

PMI will be removed automatically once you reduce principal balance to 78% of original purchase price. Homeowners Protection Act of 1998 made this law. With 5 percent down payment, it takes about 10 years for PMI to go away. For 10%-15% range it takes 5-7 years.

300,000 purchase price 4% interest rate 30 year fixed

Downpayment Loan Amount/Drop off amt Length to get there
5% $285,000/$234,000 9 years
10% $270,000/$234,000 6 years
15% $255,000/$234,000 5 years

For FHA loans you must pay PMI a minimum of 5 years or 60 months no matter what.

PMI payments stop when you have reduced the loan to  value ration 80%. You might be clever and ask, what if the real estate market goes up increasing my property value?

Let’s consider the above Scenario of a $300,000 purchase. Let’s suppose the market  increases 10% over five years and you only put down 5% originally. That represents an increase of $30,000 for your property value. Instead of waiting 9 years for the PMI to go away, it goes away in 5. It isn’t that simple though, because your lender doesn’t know that your property value has gone up. They are sticking to their original schedule. You actually have to call your lender and request an appraisal. You have to pay for this appraisal- maybe $400-$500. If the appraisal comes back and your current loan balance represents 80% LTV or less, then your PMI will be removed. However if you fall short of the 80% LTV, even just 81%, the PMI stays and you are out your appraisal cost.

Pay more interest: Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increases generally range from .75 percent to 1 percent, depending on the down payment. The advantage is that mortgage interest is tax deductible where as PMI is not. Ask your lender. 

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