VANGUARD

LOANS	CITIES	HOMES 4 SALE	HOME PAGE	CONTENTS
Private Mortgage Insurance

Private mortgage insurance or PMI protects a lender in the event of default on a loan. It is generally required by most lenders when the first mortgage exceeds 80% of the value of the home at the time the loan is written. We call this an 80% loan-to-value or LTV. The PMI charges are roughly 3/8 percent per year above 80% LTV (about $32 per month per $100,000) and 5/8 percent per year above 90% LTV (about $52 per month per $100,000). These rates are only an estimate and will vary.

Who pays for private mortgage insurance?
The borrower. It is generally paid on a monthly basis in addition to the principal and interest payments. The lender then transfers these premium payments to the mortgage insurance company.

Are there any upfront fees?
Yes. There are generally options at the time of closing. A monthly premium plan generally requires two monthly premiums be paid during the closing, with a set monthly premium due thereafter as part of the required mortgage payment. An annual plan usually requires one year of premiums paid at time of closing, with a lower monthly premium due thereafter.

Is PMI a must with less than a 20% down payment?
There are two common ways to avoid private mortgage insurance premiums:

(1) Purchase a home with a combination first and second mortgage. The first mortgage would be limited to 80% of the home's appraised value. The second mortgage, which would close in conjunction with the first, would then provide for the difference between the home's purchase price, less the 80% first mortgage, less the down payment available . In other words, if you have a 10% down payment available, your first loan would provide for the 80% mortgage with a second mortgage of 10%. This is commonly referred to as an 80 -10 -10 or a "piggy-back" transaction.

(2) Find a lender that offers self-insured programs. This type of loan has a higher interest rate in place of the private mortgage insurance premium. While mortgage insurance premium payments are not tax deductible, the interest associated with a self-insured mortgage would be fully tax deductible.

The decision among these options should consider the combined total monthly payments of the various options, adjusted for the tax benefits of interest deductions.

How can the PMI be removed?
When the property's appraised value increases to the point where loan to value ratio is below 80%, it is usually possible to remove PMI. Frequently the lender will require that an appraisal be performed by the lender's approved appraiser. Some programs require that the 80% LTV be achieved through principal reduction rather than appreciation. There is usually some minimum period of time before PMI can be removed.