The Pros and Cons of Private Mortgage Insurance (PMI)

Gene Mundt is a Chicago Mortgage Lender who is an excellent source for all things mortgage-related. Here is another gem from him:

Although the term “PMI” … Private Mortgage Insurance … is seen and heard frequently, there remains a shroud of mystery surrounding it …

When I first speak with potential Chicagoland – IL/WI Borrowers, they sometimes have a negative reaction to my introducing the topic of Private Mortgage Insurance. Their faces give their thoughts away, as they look like they just swallowed some awful tasting medicine.

But I find many times, when asked … they really don’t know or understand what PMI actually is.  They don’t know its strengths or weaknesses.  Or what value and service it can or can’t provide them.  A discussion always follows …

As with most Mortgage/financial tools, there are pros and cons to Private Mortgage Insurance. Unfortunately for Borrowers though, there is no simplistic, broad, finite answer I can provide when they ask, “Should I or shouldn’t I utilize and pay Private Mortgage Insurance“?

(I add:  If anyone expresses a snap judgment or opinion regarding the use of PMI … run!)

Prior to making a decision pro or con:  Some math must be done.  Then some comparisons, as the Borrower and I must discuss the pros and cons of utilizing (and not utilizing) PMI.  The Borrower must then make a decision based on their specific needs/finances.  PMI is just not a “one-size-fits-all” thing.

In most cases:  I find that the real option for my Borrowers is not IF Mortgage Insurance will be required.  It’s more a question of what their PMI will cost?  Still, there’s no quick easy answer for that either.

Why?  The answer is always directly tied to the finances and needs of the individual(s) applying for Mortgage.  The mortgage applicant(s) is the only one that can ultimately judge the merits of their using PMI (or not) … and at what level/cost.

So what facts and information are needed to make a sound decision?

Having the answers to the following will help:

  • What is Private Mortgage Insurance?
  • Why is PMI needed by some Borrowers?
  • What value dies PMI offer when financing?
  • What PMI options are available?
  • How is PMI calculated?
  • How does PMI differ from Title Insurance or Homeowners Insurance?
  • How long do I pay PMI on my loan?
  • How do I “get rid” of PMI?

     *  For Conventional Loans Only:  Here are some facts you should know regarding Private Mortgage Insurance:

  1. Private Mortgage Insurance is required when a Mortgage Loan greater than 80% of Value/Sales Price is made.  (In other words, if LESS than a 20% Down Payment is made.)
  2. Mortgage Insurance is provided and available through several privately owned companies, thus the term: Private Mortgage Insurance (PMI)
  3. Borrowers pay their Lender monthly for their PMI costs (within their monthly mortgage payment).  Their Lender, in turn, pays out the same amount to the Private Mortgage Insurance Company
  4. In most cases, there are other plans available for Annual OR upfront payments of PMI
  5. Lenders cover their Loan Risks (limit their risks) to an 80% level, (Outstanding Loan VS Property Value), known as Loan-to-Value (LTV) with the implementation of Private Mortgage Insurance
  6. Considering a Lender’s risk of Lending more than 80% of Value/Sales Price, with Loan Programs allowing as low as 3% Down Payment:  There are varying stages or levels of Private Mortgage Insurance charges/costs.  They are based on the increments of Down Payment percentages made by the Borrower (3%, 5%, 10%, and 15% Down Payment).
  7. The greater the Down Payment percentage, the PMI is charged/calculated at a lower percentage of the loan amount (thus lower Monthly Payments toward PMI)
  8. Credit Scores affect the cost of Private Mortgage Insurance.  Higher Scores = Lower Costs.
  9. On Conventional Loans:  Lenders can require the existence of PMI until the Loan Balance is paid down to 80%* of the original Sales Price/Value, and MUST release a Borrower from paying any Private Mortgage Insurance when the loan is paid down to 78% of original Value/Price.  (* Borrowers must request the removal of PMI at the point a loan is paid down to 80%.  Lenders must remove PMI at the 78% level.)
  10. Refinancing of a loan that has PMI currently, is a common way to eliminate/reduce substantially the cost of Private Mortgage Insurance.
  11. Refinancing is especially beneficial when the Interest Rate on the Mortgage Loan can also be reduced at the same time.  (With Interest Rates currently so low (as of 8/31/2016), Refinancing for this purpose is extremely favorable and popular).

As you can see from the info above, arriving at a decision regarding the use of Private Mortgage Insurance can be somewhat challenging for Borrowers. So it’s not unusual for me to hear one or all of the following:

  • Wow! 
  • Can I avoid PMI?
  • Can I limit its costs?
  • How can I do that? 

The answers to the above questions will be provided in my next post.  But it’s important to point out here:

  • There IS a difference between FHA and Conventional Mortgage Insurance.  (Makes the decision even more interesting!)
  • FHA Mortgage Insurance will be addressed in a separate blog (to follow)
  • Private Mortgage Insurance may be a sound viable solution if you’re a hopeful home buyer wanting to buy with a small Down Payment
  • It may be the ONLY option for you if you’re a Borrower hoping to buy/Refinance with less than 20% down
  • Entering housing markets while interest rates are so low, borrowing money is so cheap, rents are rising quickly, and home prices may still be in reach can offset the cost of paying PMI.  Only you can decide if it’s a beneficial decision for you to do so.
     And again, the only way to arrive at a sound decision is to contact your lender, ask questions, and gain the facts and info you need.
     If you’re considering the purchase and/or financing of a home … and the possible use of Private Mortgage Insurance:  Seek all the facts and answers you need to make an informed decision right for YOU …

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