Private Mortgage Insurance (PMI or MI)

By
Mortgage and Lending with Umpqua Bank NMLS #115765
http://actvra.in/Lkl

What is Private Mortgage Insurance (PMI)?

Over the last 5 years, when 2nd mortgages became more popular because of low rates and rapid appreciation, PMI, or MI, lost favor.  NOW, banks don't want to be left holding the bag in 2nd position if the property depreciates...so lenders are opting to make "one loan" financing more common.  There are a number of choices on how to pay MI:  lender paid, borrower paid monthly, upfront borrower paid, upfront lender paid, financed into the loan amount, or a combination of the methods.   To find out more, send Rich Sweum an email from his website, www.RichSweum.com

PMI is normally required when you buy a home with less than 20 percent down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage insurance companies to protect the lender. It enables lenders to offer loans with lower down payments. In effect, mortgage insurance pays the lender a certain percentage of your original purchase price to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you would need to make a 20 percent down payment in order to buy a home.

The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10 percent down payment is less than the cost of PMI on a 5 percent down payment. Your PMI premium is normally added to your monthly mortgage payment.

Cancelling your PMI:

Federal law requires PMI to be cancelled under certain circumstances, and Fannie Mae guidelines provide for cancellation of PMI in additional situations if the loan is owned by Fannie Mae. In general, PMI for a loan originated on or after July 29, 1999, which is secured by the borrower's one-family principal residence or second home will be cancelled at the borrower's request when the loan-to-value ratio (LTV) reaches 80 percent based on the value of the home at loan origination. In order to cancel PMI under the rules of July 29, 1999, the borrower must have a good payment history and the property value must not have declined.

PMI on mortgages owned by Fannie Mae can also be cancelled at the borrower's request when the LTV reaches 75 percent based on the current value of the home as established by a new appraisal, provided that the borrower has a good payment history and that the loan is at least two years old.

If the borrower does not request PMI cancellation, the PMI servicer must automatically cancel PMI on these loans when the LTV is scheduled to reach 78 percent, based on the value of the home at loan origination, provided that the loan is current at that time. For loans originated before July 29, 1999, which are secured by the borrower's principal residence or second home and that are owned by Fannie Mae, PMI will generally be cancelled at the midpoint of the loan term, provided that payments at that time are current.

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Rainer
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Wolf Leonard
Jacksonville, FL

"PMI on mortgages owned by Fannie Mae can also be cancelled at the borrower's request when the LTV reaches 75 percent based on the current value of the home as established by a new appraisal, provided that the borrower has a good payment history and that the loan is at least two years old."

In some declining markets, what happens when a house slips from say a 70-30 LTV to 85-15 ?  Does the PMI requirement kick in ?  

I'm guessing not, if PMI was not already in place, though cancelling exisiting PMI in a declining market looks to be on hold for now.

Jan 22, 2009 07:08 AM #1
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Rainmaker
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Richard Sweum

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