But I Have PMI!

Posted October 11th, 2010
by HomeownersInsurance.org Staff (no comments)

Many of today’s mortgages are required to have Private Mortgage Insurance, or PMI. If you’re thinking that gets you off the hook for buying homeowners insurance, think again. PMI is insurance that protects your lender if you default on the home loan. It does nothing to protect you financially in the event of a fire, theft, or natural disaster.

  • Lenders typically require that borrowers carry PMI if they don’t have the usual 20% down payment at the time of purchase. That’s because home loans without the larger down payment are seen as riskier investments, and the lender needs to be sure to get repaid if the borrower defaults.
  • The PMI payment is usually rolled into the monthly mortgage payment made to the lender. After several years of paying on the loan, borrowers may contact their lender and ask that the PMI payment be cancelled. You will need to be sure you have paid down the loan enough to cover the original 20% down payment amount.
  • The Homeowner’s Protection Act (HPA) requires lenders to send annual disclosures to borrowers to tell them how much of the loan principal has been paid off. Your notification should alert you when you have 30% equity, and are entitled to cancel your PMI.
  • For mortgages that originated on or after July 29, 1999, lenders are required to refund all unearned PMI premiums. In other words, if you were eligible for cancelation but continued paying premiums, your lender must refund your money.
  • You can avoid the PMI payment by taking out a loan to cover the costs of the down payment amount. This is also known as piggybacking, where the borrower comes up with a smaller down payment (such as 5%) and finances the remaining portion (in this case 15%) as a second mortgage. The piggyback loan typically comes with a higher interest rate than the primary mortgage. However, people with good credit usually find that this type of financing costs less than getting a single mortgage for more than 80% of the purchase price and then paying extra for mortgage insurance.

While HPA doesn’t apply to mortgages in place before July 29, 1999, homeowners still have options. If you have more than 20% equity in your home, you may be able to cancel your PMI. It never hurts to contact your lender and ask. You may be surprised how much money you could be saving.

Categories: Advice

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