Private mortgage insurance (PMI) is a term many Santa Cruz home owners have heard but few understand. Unfortunately, even more home owners have paid PMI premiums long after it was needed because they didn't know they could cancel.
Here are answers to questions I am most frequently asked about PMI:
What is Private Mortgage Insurance (PMI)?
As its name states, PMI is insurance. Like all insurance, it protects someone against the loss of something. For example, car insurance protects the car owner against the loss of his car. In this case, PMI protects lenders against the loss of their money if borrowers fail to repay their mortgage.
If you buy a house and make a down payment of less than 20%, lenders require that you pay for PMI insurance. Let’s use an example of Jane buying a Santa Cruz home for the purchase price of $400,000. She has $40,000 for a down payment, which is 10% of the purchase price. That means she has to pay for PMI.
What’s the cost of PMI?
PMI premiums vary depending on the mortgage insurance company you use. Generally, they range from .5 to 1% of the amount of your home loan. You have the option of choosing the insurance company you would like to work with, and there are many to choose from. As with any insurance, you should shop around to find a company with which you feel comfortable.
Do all loans require PMI?
No, if you put down 20% or more of the purchase price of your Santa Cruz home, you are not required to buy PMI.
I've made mortgage payments for 2 years why do I still need PMI?
Understanding how your loan works is very important. The first several years of your mortgage payments go toward paying down the finance charges (interest) on your home loan. PMI is based on the principal (the amount you actually borrowed), not including finance charges. Because of this, it can take many years to reach the point where you’ve paid off 20% of the price of your home.
How do I know when I can stop paying for PMI?
The Homeowners Protection Act (HPA) requires lenders to inform a buyer at closing that PMI can be cancelled and at what point in the loan this will occur. However, it is still your responsibility as the home owner to request cancellation once you qualify. In other words, no one is going to automatically cancel your PMI when you’ve paid off 20% of the price of your home. You must do that or you continue to pay.
What if I forget to ask to have my PMI cancelled?
If you do not ask for PMI to be cancelled, you’ll continue to pay PMI until you’ve paid off 22% of the price of your home. Fortunately, the lender is required to automatically cancel PMI once you’ve reached the 78/22 point, which means you’ve paid off 22% and only owe 78% of the price of your home. However, if your loan isn’t current or has more than one late payment in the past year, you still must pay for PMI.
What if I have had late mortgage payments in the past?
As long as you have had no more than two late payments in the past two years, the lender will allow you to cancel.
What if I have had more than 2 late mortgage payments?
The lender will require you to maintain PMI until your home loan reaches 77/23, at the earliest. In some cases, the lender can require you to maintain PMI up to the halfway point in your home loan, at which time they are required by HPA to cancel.
Will I ever have to get PMI again for my Santa Cruz home loan?
No. Once PMI has reached the cancellation point and has been cancelled, the lender can't require you to purchase additional PMI. The only way that can change is if you refinance your current home loan.
If you have questions about PMI or any other real estate related questions, I’m happy to help. Give me call today at 831-662-6522 or email me at Lauren@LaurenSpencer.com.
For more information, please visit my website at www.MySantaCruzRealEstate.com.