Private Mortgage Insurance Basics

Keep in mind that when you buy a home and don't have 20 percent down, you may be required to pay for private mortgage insurance (PMI). PMI gives homebuyers the ability to buy a home with as little as three to five percent down. It also provides loan servicers assurance that, should your mortgage go into default and your home is foreclosed upon, the loan will be paid for. Those are the advantages, but there is a dark side to PMI.

A good example of this involves a recent bout Bank of America experienced with the Massachusetts Attorney General's office. In November 2009, Bank of America acquired Countrywide Mortgage loans. Countrywide was already under scrutiny due to questionable mortgage tactics regarding the removal of PMI on mortgages paid below 80 percent of the original loan. Qualified homeowners were requesting that PMI be removed, but Countrywide was not complying. Bank of America settled and no further court action was initiated by the state.

Some things you may not know about PMI are that the IRS allows it as a deduction on your federal taxes if you qualify, you can legally require a mortgage company to remove the PMI and you can decide which PMI company to use. The primary requirement for deducting PMI on your federal taxes is that your adjusted gross income (AGI) fall at or under $100,000 if you are married filing jointly. To claim the full deduction, the maximum AGI for those married filing separately is $50,000. You cannot claim a deduction for your PMI if your AGI exceeds $109,000.

Congress passed a law in 1998 called the Homeowner's Protection Act (HPA), which addresses changes regarding the lawful use of PMI. Generally, this law applies to residential property and requires lenders to remove PMI if the principle of the loan equals 80 percent of either the appraised value when the loan was obtained or the original purchase price at closing. There are some considerations to keep in mind. You must be current on your home loan in order for the PMI to be terminated, and you must have been current throughout the previous year.

Under HPA, lenders are required to automatically terminate PMI once your loan is paid down to 78 percent. Again, you must be current on your payments. Another requirement of HPA is that lenders are required to provide specific disclosures to homebuyers on closing. Some specifics include the borrower's right to request that PMI be canceled, the date on which the request may be submitted and the lender's responsibility to automatically terminate PMI.


Another thing most borrowers don't know about PMI when obtaining a home loan is that you do not have to use the PMI company referred to you or suggested by your lender or real estate professional. Shop around and compare prices to get the best deal.

You will have to put forth some effort to work PMI to your greatest advantage, but if you do, you'll come out way ahead and pay far less than if you depend solely upon your lender to do the job.

Ki is an investor and broker working in the Austin real estate market. His site provides a graphical search of homes in the Austin MLS. It also has profiles of different areas in the Austin real estate market and graphs showing historical mortgage rates.