What is PMI?
How does PMI
work?
Could obtaining
PMI help me
qualify for a
larger loan?
What does PMI
cost?
How is PMI paid?
How does the
buyer apply for
PMI?
What is 80-10-10
financing?
Cancellation of
PMI
History of PMI
PMI Companies
(Names &
Addresses)
What is PMI?
If you make a down
payment of less than
20% of the purchase
price of the home,
mortgage lenders
generally require
that you take out
Private Mortgage
Insurance (PMI) that
protects the lender
incase you default
on your mortgage.
You may need to pay
up to a year’s worth
of premium for this
coverage at closing,
which can amount to
as much as several
hundred dollars. One
obvious way to avoid
this extra cost is
to make a 20% down
payment. There are
also other ways to
eliminate PMI such
as 80-10-10
financing which is
further described in
this section.
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How does PMI work?
PMI companies write
insurance protecting
approximately the
top 20% of the
mortgage against
default, depending
on the lender’s and
investor’s
requirements, the
loan-to-value ratio,
and the particular
loan program
involved. Should a
default occur, the
lender sells the
property to
liquidate the debt,
and is reimbursed by
the PMI company for
any remaining amount
up to the policy
value.
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Could obtaining PMI
help me qualify for
a larger loan?
Yes. Let’s say that
you are a family
with $42,000 annual
gross income and
monthly revolving
debts of $800 (car
payment and credit
cards) and have
$10,000 for a down
payment and closing
costs on a mortgage
at 7% interest.
Without PMI, the
maximum price you
can afford is
$44,600. But with
private mortgage
insurance covering
the lender’s risk,
you can buy a house
worth $62,300. PMI
has afforded you 39%
more house.
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What does PMI cost?
Costs vary from
insurer to insurer,
as well as from plan
to plan. For
example, a highly
leveraged adjustable
rate mortgage would
require the borrower
to pay a higher
premium to obtain
coverage. Buyers
with 5% down payment
can expect to pay a
premium of
approximately 0.78%
times the annual
loan amount ($92.67
monthly for a
$150,000 purchase
price). But the PMI
premium would drop
to around 0.52%
times the annual
loan amount ($58.50
monthly) if a 10%
down payment was
made on the loan.
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How is PMI paid?
PMI fees can be paid
in several ways,
depending on the PMI
company used.
Borrowers can choose
to pay the
first-year premium
at closing; then an
annual renewal
premium is collected
monthly as part of
the house payment.
Or the borrower can
choose to pay no
premium at closing,
but add on a
slightly higher
premium monthly to
the principal,
interest, tax, and
insurance payment.
Buyers who want to
sidestep paying PMI
at closing but not
increase their
monthly house
payment can finance
a lump-sum PMI
premium into their
loan. With this type
of payment plan,
should the PMI be
canceled before the
loan term expires
(through
refinancing, paying
off the loan, or
removal by the loan
servicer), the
buyers may obtain
the rebate of the
premium.
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How does the buyer
apply for PMI?
Although the buyer
typically bears the
cost of PMI, the
lender is the PMI
company’s client,
and shops for the
PMI on behalf of the
borrower. Many
lenders deal with
only a few PMI
companies because
they know the
guidelines for those
insurers. This can
be a problem when
one of the lender’s
prime companies
turns down a loan
because the borrower
doesn’t fit its risk
parameters. An
uneneterprising
lender might follow
suit and deny
approval on the loan
application without
consulting even a
second PMI company.
This obviously could
leave all the
parties involved in
an undesirable
position.
The lender has an
increasingly
difficult task to be
fair to the borrower
while shopping for
the most effective
method to soften
liability.
Sometimes, it may
appear that a lender
has no justification
for doing what he or
she does – but if we
look deeper, it is
undoubtedly there.
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What is 80-10-10
financing?
Surprising as it may
seem, some folks
with hefty incomes
find that it’s
mighty tough for
them to save enough
money to make a 20%
cash down payment on
their dream homes.
Using conventional
financing, such
buyers must purchase
Private Mortgage
Insurance (PMI)
which increases the
cost of home
ownership and,
ironically, makes it
even more difficult
to qualify for the
mortgage. However,
if you’re a
dues-paying member
of the
cash-challenged
class, don’t
despair. Given that
your income is
sufficiently high,
it’s eminently
possible to avoid
getting stuck with
PMI. That is why
80-10-10 financing
was invented. It is
called 80-10-10
because a savings
and loan
association, bank,
or other
institutional lender
provides a
traditional 80%
first mortgage, you
get a 10% second
mortgage, and make a
cash down payment
equal to 10% of the
home’s purchase
price. By using this
method, you are no
longer obligated to
take out PMI on your
property.
The same principle
applies if you can
only afford to make
a 5% down, 80-15-5
financing is also
available. However,
because a smaller
cash down payment
increases the
lender’s risk of
default, do not be
surprised when you
are asked to pay
higher loan fees and
a higher mortgage
interest rate for
80-15-5 than you pay
for 80-10-10.
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Cancellation of PMI
The Homeowners
Protection Act of
1998 - which became
effective in 1999 -
establishes rules
for automatic
termination and
borrower
cancellation of PMI
on home mortgages.
These protections
apply to certain
home mortgages
signed on or after
July 29, 1999 for
the purchase,
initial
construction, or
refinance of a
single-family home.
These protections do
not apply to
government-insured
FHA or VA loans or
to loans with
lender-paid PMI.
For home mortgages
signed on or after
July 29, 1999, your
PMI must - with
certain exceptions -
be terminated
automatically when
you reach 22 percent
equity in your home
based on the
original property
value, if your
mortgage payments
are current. Your
PMI also can be
canceled, when you
request - with
certain exceptions -
when you reach 20
percent equity in
your home based on
the original
property value, if
your mortgage
payments are
current.
One exception is if
your loan is
"high-risk." Another
is if you have not
been current on your
payments within the
year prior to the
time for termination
or cancellation. A
third is if you have
other liens on your
property. For these
loans, your PMI may
continue. Ask your
lender or mortgage
servicer (a company
that collects your
payments) for more
information about
these requirements.
If you signed your
mortgage before July
29, 1999, you can
ask to have the PMI
canceled once you
exceed 20 percent
equity in your home.
But federal law does
not require your
lender or mortgage
servicer to cancel
the insurance
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History of PMI
Private Mortgage
Insurance originated
in the 1950s with
the first large
carrier, Mortgage
Guaranty Insurance
Corporation (MGIC),
referred to as
“magic”. For this
reason, early PMI
methods were deemed
to “magically”
assist in getting
lender approval on
an otherwise
unacceptable loan
package. Today,
there are eight PMI
insurance
underwriting
companies in the
United States.
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PMI Companies
|
Amerin
Guaranty
Corporation
303 East Wacker Drive, Suite 900
Chicago, IL 60601
Tel:
800-257-7643
Fax:
312-540-0564
|
PMI Mortgage
Insurance
Company
601 Mongomery Street
San Francisco, CA 94111
Tel:
800-288-1970
Fax:
415-291-6175
|
|
Commonwealth
Mortgage
Assurance
Company
1601 Market Street
Philadelphia, PA 19103-2197
Tel:
800-523-1988
Fax:
215-496-0346
|
Republic
Mortgage
Insurance
Co.
P.O. Box 2514
Winston-Salem, NC 27102-9954
Tel:
800-999-7642
Fax:
919-661-0049
|
|
G.E. Capital
Mortgage
Insurance
Corporation
P.O. Box 177800
Raleigh, NC 27615
Tel:
800-334-9270
Fax:
919-846-4260
|
Triad
Guaranty
Insurance
Corp.
P.O. Box 25623
Winston-Salem, NC 27114
Tel:
800-451-4872
Fax:
919-723-0343
|
|
Mortgage
Guaranty
Insurance
Corporation
P.O. Box 488
Milwaukee, WI 53201
Tel:
800-558-9900
Fax:
414-347-6802
|
United
Guaranty
Corporation
P.O. Box 21567
Greensboro, NC 27420
Tel:
800-334-8966
Fax:
919-230-1946 |
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