Private Mortgage Insurance (PMI) is an insurance that protects the lender if a borrower defaults on their loan on conventional loans. FHA loans use MIP. This insurance is what encourages the lender to make loans over 80% LTV. When a borrower defaults on their mortgage, that the average amount recovered by the bank after foreclosure, due to costs, is 80% of the value of the home. The PMI protects the bank by covering what they will not recoup in a worst case scenario. Before PMI, when our grandparents bought homes, 20% down was needed. PMI is temporary until you establish 20% equity in your home.
With the housing crisis PMI has become more costly. These rates are current as of the 3/30/2011.
There are 2 alternatives to paying BPMI (regular Borrower Paid Mortgage Insurance) which are explained below:
2) Piggyback 2nd mortgage (which is not readily available anymore).
Highlighted coverage is most common lender requirement.
First, calculate the LTV:loan amount or loan amount sales price (purchase) appraised value (refinance)
Second, find the PMI Factor in the LTV chart above and add any adjustments below:
Adjustments to PMI factor:
- 5-25 year loan: -.11
- Cash out refinance +.20
- Loan amount $417,000 to $729,750 +.10 or 25% depending on FICO
- Rate and Term refinance with FICO < 720 +.10%
- Second Home .14%
Third, take the final PMI Factor use it in the calculation Loan Amount x PMI Factor / 100 / 12 = Monthly PMI Price
Summary- Benefits of BPMI:
PMI is now tax deductible for those with adjusted gross income of less than $100,000. If you qualify for this deduction, PMI may be to your advantage, especially 80-85% LTV loans where the PMI is inexpensive. Please contact us at 610 326-2099 to work up a PMI comparison. PMI has been the best option for most borrowers with less than 20% down since 2008 because of the tax benefits and the mortgage loan guideline changes with 2nd mortgages.
The draw back of LPMI is its long term cost: We advise never to accept LPMI unless you are going to be moving or otherwise paying off the mortgage in the immediate future. The reasons: It can never be removed! PMI is only paid until you build some equity (20%) and then it goes away. LPMI is a higher rate you pay for the life of the loan. It may be tax deductible, but it will cost much more than the other 2 options over 30 years. Mortgage companies like it, because they make more money with the higher interest rate, but we rank it the worst option for those who plan on keeping the loan for more than a few years.
You may remove PMI by paying the principal down to 80% instead of waiting for it to occur naturally through amortization. If you want to remove the PMI through appreciation of the home, you typically must wait 2 years and have an appraisal done. (Consult your lender for their policies.)