PMI also enables mortgage companies to grant loans that would otherwise be considered too risky to be purchased by third-party investors like Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation). The ability to sell loans to these investors is critical to maintaining mortgage market liquidity, which in turn allows mortgage companies to continue originating new loans.
PMI Payment Options
PMI can typically be paid monthly or with a single premium at closing. Premiums are based on the amount and terms of the mortgage and can vary according to the equity in the property, type of loan, the amount of coverage required by the mortgage company, and the homebuyer’s credit characteristics and income.
If homebuyers choose to pay their PMI premium monthly, the premium will be collected with their regular monthly mortgage payment. If they choose a single-premium plan, the entire premium covering several years is paid in a lump-sum at the time of loan closing. In the single-premium scenario, homebuyers may be able to add the lump-sum premium to the loan amount. By doing this, homebuyers can reduce their upfront costs and may be able to increase their interest deduction. Note: For tax advice, please consult a tax advisor regarding your specific situation.
PMI can usually be canceled by homebuyers after they have at least 20 percent equity in their home. Homebuyers should contact their mortgage servicer to find out the procedure for canceling their PMI when they think they have achieved 20 percent equity. Guidelines for canceling PMI are set by the mortgage servicer. Typically, investors will require an appraisal on the property. The servicer can recommend qualified local appraisers. On primary residences, the Homeowners Protection Act requires that PMI be automatically canceled when the loan is scheduled to reach 78 percent of the original loan-to-value (LTV), or in other words, 22 percent equity based on the original sales price or original appraised value, whichever is lower.
PMI vs. FHA Mortgage Insurance
Although the insurance protection concept is similar, there are differences between PMI and FHA mortgage insurance. FHA mortgage insurance is a government-administered mortgage insurance program that has certain restrictions and will be required for the loan regardless of equity. With FHA mortgage insurance, there are set maximum regional loan limits that may be lower than those with private PMI. FHA mortgage insurance can be more expensive, take longer to receive approval, and have fewer payment plan options. FHA mortgage insurance is a good choice for some homebuyers with credit history problems or limited down payment funds, or for those who might need special assistance.