Private mortgage insurance (PMI) protects the lender or investor against loss, not the home owner. If you pay 5% down, the PMI company will insure, or guarantee, the top 10% of the loan. If you go into default, they will reimburse the lender.
- Typically PMI is required for a sale if there is less than a 20% down payment.
- Not all lenders require PMI, even for low down payment loans.
- PMI protects the lender, not the consumer.
- PMI costs vary but are usually 0.5% of the loan amount for the first year of the loan, with lower payments in later years.
- PMI is collected by the loan servicer, and sent to the PMI company.
- PMI removal is based on both the payment history and the value of the collateral (house).
- Early cancellation PMI removal requirements vary considerably among lenders.
- There are only four companies that offer PMI.
How to get PMI removed
Most, but not all, lenders will remove their PMI requirements if:
- The loan to value ratio on your loan is 80% or less. (Some require 75% or another LTV).
- You have made your payments on time for two years.
Step 1 – Contact your lender
Your first step is to contact your lender (the company you send your payments to). Contact information should be on your payment stub or invoice. Lender requirements vary widely on LTV, etc.
Step 2 – Get an Appraisal
Your lender will tell you which appraiser you can use. Sometimes you can select your own appraiser. Sometimes the lender chooses the appraiser. Note: you do not need an appraisal if you have paid off at least 20% of your original loan amount.
How much does PMI cost?
The cost varies, depending on percent down, type of loan, and amount of coverage. In general, looking at a sales price of $119,000 for a home and a 30-year fixed rate mortgage, with 10% down, the MI premium would be $45 per month. With a 5% down payment, it would be $70 per month.
Originators, lenders and servicers – Who does what?
In today’s market of originators, funders, and servicers doing separate roles, many are confused about who does what. For example, you get a loan originated by ABC Company (mortgage broker), who markets the loan to XYZ Mortgage Company (funds the loan), who sells the loan servicing – released to Bank of A (who holds the loan in portfolio), and your loan payments are made to Bank B, a large servicer. PMI cancellation is done by the servicer (Bank B).