Is private mortgage insurance good or bad?
Robert J. Bruss Real Estate Notebook
Unless you are involved with real estate you probably have never heard of PMI. No. It's not a serious disease. In fact, PMI can be extremely beneficial if you are a "cash challenged" home buyer without a sufficient down payment.
PMI stands for "private mortgage insurance." It has enabled millions of house and condo buyers to purchase with zero, 5 percent or 10 percent cash down payments.
Please be aware PMI is not the same as FHA home loan mortgage insurance, which is FHA-insured and has nothing to do with conventional mortgage PMI.
But PMI can be very expensive for home buyers. More irritating, when the need for PMI ceases to exist, because the home has appreciated in market value or the home owner has added extensive home improvements, getting rid of the PMI monthly premiums can be extremely difficult, or even impossible if the lender is uncooperative.
• The major benefits
Private mortgage insurance protects institutional mortgage lenders from foreclosure loss due to their risk of making home loans that exceed 80 percent of the home's market value.
To illustrate, suppose you want to buy a house or condo. But you don't have any cash down payment. Don't let that stop you. Virtually every mortgage lender in town has a loan program for you (presuming you have decent credit and an income source).
Thanks to the generous Fannie Mae and Freddie Mac 103 percent mortgages, you can even finance your closing costs if the mortgage doesn't exceed $333,700.
However, buying a home without a cash down payment will be expensive. That is because your mortgage lender will require insurance protection for the top, riskiest portion of your loan that exceeds 80 percent of the home's appraised market value.
That is where PMI comes in. One of the seven nationwide PMI lenders will agree to insure your lender against foreclosure loss if you default on mortgage payments. To qualify, you must have good credit and good income.
• The drawbacks of PMI
Presuming you have good credit and adequate income for your low- or nothing-down home purchase, you should be aware of the PMI drawbacks.
The extra cost to you, as a home loan borrower, will be approximately 1 percent extra on your mortgage interest rate. The exact PMI monthly premium varies according to the amount of your insured mortgage.
To illustrate, in today's mortgage market suppose you find a 6.25 percent interest rate mortgage. If you need PMI, you will be paying roughly the equivalent of 7.25 percent interest. Considering you have little or no cash invested in your home, that's still a "good deal" if you can afford the total monthly payments.
However, the PMI premium portion of your monthly payment is not tax deductible as interest.
But some mortgage lenders, instead of imposing PMI premiums, charge a higher tax deductible interest rate. If tax deductions are important to you, shop around for high-ratio mortgages without PMI premiums.
• Getting rid of unneed PMI is the biggest drawback
For some unexplained reason, the PMI industry of only seven nationwide insurers makes it extremely difficult for PMI home loan borrowers to cancel their PMI premiums when such insurance is no longer needed.
Fannie Mae and Freddie Mac, the nation's largest owners of home mortgages, have guidelines telling their loan servicers to cancel PMI premiums if the loan has been in effect at least 24 months, the borrower has an on-time payment record, and the owner's equity is at least 20 percent as determined by a new appraisal from an "approved appraiser" paid by the borrower.
That seems very fair to borrowers. But the "real world" reality is far different. If the home loan was not purchased by Fannie or Freddie in the secondary mortgage market, the current mortgage investor-owner can set their own often-unreasonable rules for canceling PMI.
Their unstated reason, of course, is in the event of a foreclosure loss, the lender wants that PMI protection (even when the homeowner's equity exceeds 20 percent and risk of foreclosure loss is minimal).
In 1999, Congress enacted legislation to require lenders to cancel PMI when the homeowner's loan-to-value ratio dropped below 78 percent. But for most homeowners, this won't happen until after at least 10 years of unnecessary PMI payments.
The reason is this useless federal law only applies to home mortgage principal reduction and does not consider market value appreciation or home improvements added, as shown by a new professional appraisal of the house or condo.
• How to get rid of your PMI
If you are not able to convince your mortgage lender to cancel your unnecessary PMI, which is typically $50 to $200 per month wasted money after you have at least 20 percent home equity, you have several alternatives.
The easiest choice is to refinance with another mortgage lender who does not require PMI. However, this might be inconvenient and could result in an increased mortgage interest rate.
Another choice that many borrowers have successfully used is to always make their full monthly mortgage payment on time, including the PMI premium. But then they sue their mortgage lender each month in local Small Claims Court for a refund of the unnecessary PMI premium. After a few months of receiving default judgments for not showing up in court over small amounts, most mortgage lenders give up and cancel the unnecessary PMI premiums.
• Ask for a refund when your PMI is canceled
Whether you refinance with another mortgage lender, or use the Small Claims Court strategy to get your home loan lender to cancel your PMI, you might be entitled to a refund.
Refund checks of $100 to $1,500 or more often result. The reason is PMI is collected monthly from the borrower, but remitted annually to the PMI insurer.
• FHA home loans do not have PMI
However, if you have a FHA home loan, you pay MMI (mutual mortgage insurance) rather than PMI. Only if you pay off your FHA home loan in full, you might be entitled to a partial FHA mortgage insurance refund.
If you do not receive a MMI partial refund check within 45 days after paying off your FHA mortgage in full, contact HUD at (800) 697-6967 or write to U.S. Dept. of Housing and Urban Development, PO Box 23699, Washington, DC 20026-3699. Or, on the Internet, go to www.hud.gov/offices/hsg/comp/refunds/index.cfm and enter your exact borrower's full name and FHA case number to learn if HUD owes you a partial MMI refund after paying off your FHA home loan.
This is not a commitment for a loan or an ad for credit as defined by paragraph 226.24 of regulation Z.