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Private Mortgage Insurance

PMI = Private Mortgage Insurance

If you haven't figured it out thus far, lenders make every effort to insure that they will not lose out on getting their money back. They want security that they will be protected against any unfortunate event that may occur regarding the property on which they have loaned their good money.

So far, they have made sure that the house won't be taken by the government because they are escrowing for property taxes. They have made sure that they will get their money out of the house if it is damaged or destroyed because they are escrowing for homeowner's insurance. The lender can relax now, there is nothing more to fear. Or is there? There is one more unfortunate possibility for which the bank MUST be prepared:

What if you, the borrower, lose your job, or become disabled, or for whatever reason, just stop paying the mortgage?

The answer….P.M.I. -- private mortgage insurance. In the simplest terms, private mortgage insurance is a premium that YOU pay for the lender to insure that, if you default (stop paying) on your mortgage, the lender can file a claim and get their money back. Isn't that a kick in the keester? The lender wants insurance to protect them in the event that you default on your mortgage, but YOU have to pay the premium on that insurance. Oh well, somehow it is legal. You need their money to pay for your house, so they pretty much have you over a barrel, huh? The relatively good news is that PMI private mortgage insurance premiums are tax deductible now just like the mortgage interest is. Your lender will send you a tax form each year called the INT form. This form will give you the amount of interest you have paid to your lender during the previous year. The interest paid and the p.m.i. amounts paid are spelled out clearly in their own little boxes on the form.

You do not have to pay p.m.i. if you are able to put 20% or more down on the property. On your $200,000 house, that means you would have to have a down payment of $40,000 or more.

The lending industry knows that once a borrower has such a large personal investment in a home, he is much less likely to default (stop paying). After all, if you stop paying your house payment, you will lose your house. If you lose your house, you lose your $40,000. Chances are, a borrower who has put that kind of hard cash into a home will bend over backwards to hold onto it and protect his investment.

On the other hand, take a borrower who has moved into a home using one of those 100% loan programs and paid nothing out of his pocket to "buy" the house. That borrower really is no better than a renter who can move in the house, stop paying the payments after a few months, and still be able to live there for another two to three months before the lender forecloses and re-possesses the house. That borrower has not lost at all. As a matter of fact, that guy has beaten the system, at least for the short term. He'll not be able to borrow from anyone else for quite a while, but he isn't out any money. The lender is the loser in that scenario.

Unfortunately, that exact scenario has played out all too often. Our economy is paying the consequences. But that is a subject for another day. By the way, the lending industry seems to have learned its lesson about letting people move into a home with no down payment.

100% loans are hard to come by these days.

The P.M.I - private mortgage insurance premium is based on a percentage of the loan amount, and varies depending on your loan program, down payment, etc. Actually, borrowers have the option of paying the p.m.i. premium in one lump sum at closing, but I've never seen that happen. Usually, it is divided up and added onto the monthly mortgage payment. A good round figure, though, for the p.m.i "part" of your monthly is $100. It may be a little more or a little less, but we are working with estimates here. This is the final piece of the puzzle.

The principal and interest part of your payment will be about $1157.12, the tax escrow part is about $216.66, the home owner's insurance escrow part is about $50, and the p.m.i. part is about $100. The grand total of your monthly mortgage payment with all its "parts" is $1523.78. If you want to pay it off in about half the time, you should add the $95 we spoke about This amount will not be that far off from what you be quoted on a good faith estimate from a loan officer. Notice that this is way more than the estimate given by a mortgage loan payment calculator.

AN IMPORTANT NOTE ABOUT STOPPING P.M.I. PRIVATE MORTGAGE INSURANCE PAYMENTS --

Once you have paid on your mortgage long enough to build 20% equity ($40,000 on a $200,000 house) you are no longer required to pay p.m.i. premiums each month.

A homeowner who has borrowed $200,000 will reach 20% equity when his principal is reduced to a balance of $160,000. At this point, the borrower can ask the lender to cancel the p.m.i. policy—no more p.m.i. payments for you. On a $200,000 mortgage at 6% interest, the 20% equity point (principal of $160,000) will be reached after making payments for 10 years and 11 months.

That is, if you make all your payments on time. Remember, you can reach that point sooner if you make extra principal payments, which we discussed on page 2 in the bulleted section under "INTEREST".

Let me assure you, the lender is not as concerned about those p.m.i. payments going away as you are. Don't expect the lender to call one day and say, "Good news! You have paid down your principal by 20%, we're stopping the private mortgage insurance!" Not gonna happen.

It's your responsibility to keep up with it and notify them. Lenders are required by law to tell borrowers at the closing table how many years it will take to pay 20% of the principal, but most folks miss it completely.

There are so many mind-numbing exercises going on at the closing table, your head will be spinning when you walk out of the attorney's office.