Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP) - How it works
For those of you purchasing a home with either an Insured Conventional or FHA loan, you're going to be paying a premium for mortgage insurance. Why? Because the lenders want protection in case you default on your shiny new loan. I just learned today that PMI on an Insured Conventional loan doesn't exactly work as advertised. As a result, I wanted to pass on this information to you.
How can you avoid having to pay PMI or an MIP? Put 20% down on the property, then you won't have to worry about paying the extra fee for mortgage insurance each month.
The two most popular loans that require mortgage insurance are an FHA loan (MIP) and an Insured Conventional Loan (PMI)
MIP on an FHA loan works in the following way:
- Loans with less than 20% down (or less than 10% for 15 year or less mortgages) will require mortgage insurance. The monthly premium you pay is reduced as the amount you put down increases up to th 20% down payment threshold.
- In the past, mortgage insurance did not drop off automatically (loans obtained prior to Jan. 1, 2001 are not eligible to remove MIP as far as I know) for FHA loans; however, according to the FHA website, mortgage insurance will automatically drop off when you pay down 78% of loan to value. If your mortgage is a term greater than 15 years, you must also pay mortgage insurance for at least 5 years, before they will cancel automatically. If you pay down the balance before the scheduled amortization date to reach 78% loan to value, you can submit a request to your lender to have the premium removed.
- At the time of this writing, I was unable to confirm whether or not one would be required to pay for an appraisal if requesting cancellation prior to the ratio reaching 78% prior to the scheduled amortization date.
- Loans with less than 20% down will require mortgage insurance. The monthly payment is reduced as the amount you put down increases up to the 20% down payment threshold.
- Mortgage insurance is likely terminated automatically when your loan reaches 78% loan to value on the amortization schedule. Please note: this means that even if you pay extra money towards the principal to get that balance down, PMI WILL NOT automatically be cancelled when you reach 78%.
- When your loan to value reaches 20% you do have the ability to make a request to your mortgage holder to cancel PMI. This process will require you pay for an appraisal and/or BPO. This is also applicable if you've paid down to 78% or more loan to value if you have not yet reached the date on the amortization schedule.
- Your mortgage holder is required to notify you in writing (at least once each year) how to cancel PMI for your mortgage up through the time that you reach the threashold on your amortization schedule.