What is PMI (Private Mortgage Insurance) and why do I have to have it?

July 10th, 2011 by Laurence K. Hurley

What is PMI (Private Mortgage Insurance) and why do I have to have it?

Private mortgage insurance (PMI) is insurance payable to a lender that may be required when taking out a mortgage loan. This insurance is used to offset losses and risk when a lender is not able to recover its costs after a foreclosure and sale of a mortgaged property. You may not intend to foreclose on your home but foreclosure history over the past six years makes this insurance a necessity for lenders.

According to Wikipedia:

Private Mortgage Insurance (PMI) is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan.

It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.

PMI is required when the borrower has less than the 20% down payment required in order to avoid PMI. If you have 20% or more as a down payment, you don’t have to pay PMI.
The cost of PMI varies and is expressed in terms of the total loan amount in most cases. Factors affecting the PMI cost include: loan amount, Loan-To-Value of the home, occupancy (primary, second home, investment property), and most of all, credit score. Once the principal is reduced to 80% of value of the home, the PMI is often no longer required. This can happen by either the principal being paid down or home value appreciation. After reducing the principle to 80% or less, the PMI effectively “goes away.”
PMI can be paid in one of three ways. It can be paid as a single upfront payment by a) the borrower b) the lender c) or as a monthly payment along with your monthly mortgage payment.
In the case of lender-paid Mortgage Insurance, the lender will pay a one time upfront PMI fee but charges a slightly higher interest rate for that loan. In fact most No Mortgage Insurance Required loans actually have lender-paid Mortgage Insurance.

If borrowers have less than the 20% down payment needed to avoid a mortgage insurance requirement, they might be able to make use of a second loan (sometimes referred to as a piggy-back loan) to make up the difference. Quite often the borrower can obtain an 80/10/10 loan. This involves obtaining a primary mortgage for 80% LTV along with a 10% second mortgage and a 10% down payment. In some situations, the all-in cost of borrowing may be cheaper using a piggy-back than by going with a single loan that includes borrower-paid or lender-paid Mortgage Insurance.

Terry Stutts with WR Starkey provided this information. Contact Terry at 704.661.4885 for more info and to see if he can save you THOUSANDS! After your pre-approved be sure to let us find your dream home since now you can buy a bigger home in Charlotte!!

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