What is Private Mortgage Insurance?

What Private Mortgage Insurance and why do I have it?

Years ago when your grand parents bought a home they saved each extra penny they could until they had enough for a down payment that was equal to at least 20% of the  price of their dream home.

More likely your grand father was likely was  returning veteran of WWII or the Korean War and then they used their entitlements benefits under the GI Bill and probably bought their firs home with a VA loan with no money down.

For the rest of us who can’t put together a tidy sum of 20% in cash for a down payment on a home which in  Raleigh could be as much as $35,000 there’s Private Mortgage Insurance (PMI).
Private mortgage insurance exists in a variety of forms.

Here is an example of just a the most common;

Types of  PMI

What is Up Front PMI {UFPMI}?  – a lump sum paid at closing typically represented in the form of a percent of the loan. Generally this is anywhere from 1% for an FHA loan or as high as 3.5% for a VA Mortgage Loan where a veteran has subsequent use of his/her benefit. USDA loans also have UFPMI and on October 2011 they will soon have

What is Borrower Paid Monthly Mortgage Insurance {BPMI}? – this is an additional monthly premium that is paid to the insurance company by the borrower in addition to their principal & interest payment and taxes and hazard insurance.

What is Lender Paid Mortgage Insurance {LPMI}? – this is similar to BPM but it is paid by the lender. A lender may charge a higher rate in order to offset the cost or in come cases they may add insurance in what is known as “pooled insurance” where the borrower inst even aware they have PMI on their loan.

This has become a problem recently with homeowners who have found themselves underwater and couldn’t refinance their home because the lender had placed pooled PMI on their loan and failed to disclose it. This is actually the topic of one of the many lawsuits presently working themselves through jurisdictions around the country today.

Note – many loans like FHA for example require both upfront AND monthly PMI.

What is Private Mortgage Insurance {PMI} ?

Now that you have an idea what PMI is – lets talk about what it is NOT. It is not a policy that the homeowner received any benefit from other than facilitating a means to an end. The end being able to buy a home with less than 20% down payment.

Dr. Thomas N. Herzog, Ph.D., ASA has published a paper that is 81 pages complete with charts, graphs and historical references dating to 1791 titled “History of Mortgage Finance With an Emphasis on Mortgage Insurance”. My guess is you aren’t interested on what the Doctor has to say about it so here is my quick and dirty answer;

Who does Private Mortgage Insurance Protect?

PMI protects only the investor who buys the Mortgage Backed Security (MBS) or the owner of the note that you gave your lender when you wanted to buy your home. In returns for those monthly premiums and UFPMI the PMICO agreed to pay a percentage of the loan to the investor only in the event of an nonredeemable foreclosure.

How do I calculate Private Mortgage Insurance Premiums?

The rate that you will be charged will vary depending on the type of loan that your lender has recommended for you.  A government inured loan for example an FGHA, VA or USDA loan are all going to be priced the same for every eligible borrower. The exceptions is a conventional loan which will vary based on loan to value, fico score, purpose of the loan and occupancy type.

Why Do I have to Have Private Mortgage Insurance?

Remember grandma and grandpa who bout their house with 20% down payment? They will not be required to have PMI because they have enough “skin in the game” that they are not likely to walk away from that home if grandpa loses his job at the factory. In fact most of the time it never happens.

However in the case where grandpa wasn’t able to continue making the payments, the bank was confident that even if he didn’t make more than a few payments, they could turn the house pretty quickly at 80 – 90% of market value and not take much of a loss of principal.

If you have specific scenarios that need and answer – please feel free to leave a message here with the details and I will do my best to answer it within one business day.

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