The Truth About Private Mortgage Insurance

The Truth About Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is required on most conventional loans that exceed 80% loan to value (LTV). It is typically a monthly expense paid by the borrower on top of their mortgage payment. It is collected by the lender and paid to a third party insurance company.

Why the Bad Rap?

PMI has gotten a bad rap over the years, and for good reason.

First, it only protects the lender – even though the borrower pays it. Second, it is not always tax deductible. And finally, the market used to be flooded with better option portoflio programs that did not require PMI.

Most of these portfolio programs are now extinct – victims of the recent mortgage crisis that they undoubtedly helped to perpetuate. But when they were available they helped to bolster the idea that paying PMI is bad, no matter the scenario.

Why Pay It?

Lenders require PMI on loans that exceed 80% LTV.

Paying it does serve a useful purpose. It allows borrowers to borrower over 80% of the value of their home without paying a higher rate. It is needed more than ever in today’s market of declining home values.

Keep in mind that lenders look at worst case scenario when determining risk. Worst case is that the borrower defaults on the mortgage. And most homes that fall into foreclosure will be sold for less than 80% of their value. Therefore, covering themselves against default makes all the sense in the world.

So, while no one enjoys paying it, PMI is not the unnecessary evil that many of us have been programmed to think. It is simply a third-party tool used by lenders to offset risk.

PMI Myths

There are a few PMI myths that simply are not true:

  1. PMI is a fee charged by lenders – PMI is collected by the lender and paid to a third-party mortgage insurance company.
  2. PMI is tax-deductible – This tax deduction expired at the end of 2011. Loans originated after 2011 cannot deduct PMI. There is some hope that Congress still might extend it through 2012. If they do extend it, the usual limitations will apply.
  3. PMI is permanent – Typically, PMI can be removed once the loan is paid down to 80% LTV. Homeowner’s should contact their lender to find out their PMI removal procedure.
  4. Conventional PMI is the same as FHA MIP -PMI is paid to a private 3rd party insurer while MIP is paid to the government to insure the loan. FHA has different rules about when MIP can be dropped. FHA also requires MIP to be paid on almost all loans with terms over 15 years for a minimum of 5 years, regardless of LTV.

The time of vilifying PMI is long gone. PMI is a necessary tool utilized by lenders and borrowers alike. Its existence has helped millions of people obtain financing who otherwise would not qualify.

Meridian Home Mortgage is dedicated to educating our clients about all of their loan options. If possible, we will provide alternative options like Lender Paid Mortgage Insurance (LPMI) or HARP. Call today to speak to a Personal Advisor.