The Pros and Cons of Private Mortgage Insurance (PMI)

The Pros and Cons of Private Mortgage Insurance (PMI)

 

 

    Although the term "PMI" ... Private Mortgage Insurance ... is seen and heard frequently, there remains a shroud of mystery surrounding it ...

     When I first speak with potential Chicagoland - IL/WI Borrowers, they sometimes have a negative reaction to my introducing the topic of Private Mortgage Insurance. Their faces give their thoughts away, as they look like they just swallowed some awful tasting medicine.

     But I find many times, when asked ... they really don't know or understand what PMI actually is.  They don't know its strengths or weaknesses.  Or what value and service it can or can't provide them.  A discussion always follows ...

     As with most Mortgage/financial tools, there are pros and cons to Private Mortgage Insurance. Unfortunately for Borrowers though, there is no simplistic, broad, finite answer I can provide when they ask, "Should I or shouldn't I utilize and pay Private Mortgage Insurance"?  

   
 (I add:  If anyone expresses a snap judgment or opinion regarding the use of PMI ... run!)

     Prior to making a decision pro or con:  Some math must be done.  Then some comparisons, as the Borrower and I must discuss the pros and cons of utilizing (and not utilizing) PMI.  The Borrower must then make a decision based on their specific needs/finances.  PMI is just not a "one-size-fits-all" thing.

     In most cases:  I find that the real option for my Borrowers is not IF Mortgage Insurance will be required.  It's more a question of what their PMI will cost?  Still, there's no quick easy answer for that either.  

     Why?  The answer is always directly tied to the finances and needs of the individual(s) applying for Mortgage.  The mortgage applicant(s) is the only one that can ultimately judge the merits of their using PMI (or not) ... and at what level/cost.  

     
So what facts and information are needed to make a sound decision?  

     

Having the answers to the following will help:

  • What is Private Mortgage Insurance?  
  • Why is PMI needed by some Borrowers? 
  • What value dies PMI offer when financing?
  • What PMI options are available?  
  • How is PMI calculated?
  • How does PMI differ from Title Insurance or Homeowners Insurance?
  • How long do I pay PMI on my loan?
  • How do I "get rid" of PMI?

     

     *  For Conventional Loans Only:  Here are some facts you should know regarding Private Mortgage Insurance:

  1. Private Mortgage Insurance is required when a Mortgage Loan greater than 80% of Value/Sales Price is made.  (In other words, if LESS than a 20% Down Payment is made.)
  2. Mortgage Insurance is provided and available through several privately owned companies, thus the term: Private Mortgage Insurance (PMI)
  3. Borrowers pay their Lender monthly for their PMI costs (within their monthly mortgage payment).  Their Lender, in turn, pays out the same amount to the Private Mortgage Insurance Company
  4. In most cases, there are other plans available for Annual OR upfront payments of PMI 
  5. Lenders cover their Loan Risks (limit their risks) to an 80% level, (Outstanding Loan VS Property Value), known as Loan-to-Value (LTV) with the implementation of Private Mortgage Insurance
  6. Considering a Lender's risk of Lending more than 80% of Value/Sales Price, with Loan Programs allowing as low as 3% Down Payment:  There are varying stages or levels of Private Mortgage Insurance charges/costs.  They are based on the increments of Down Payment percentages made by the Borrower (3%, 5%, 10%, and 15% Down Payment).  
  7. The greater the Down Payment percentage, the PMI is charged/calculated at a lower percentage of the loan amount (thus lower Monthly Payments toward PMI)
  8. Credit Scores affect the cost of Private Mortgage Insurance.  Higher Scores = Lower Costs.
  9. On Conventional Loans:  Lenders can require the existence of PMI until the Loan Balance is paid down to 80%* of the original Sales Price/Value, and MUST release a Borrower from paying any Private Mortgage Insurance when the loan is paid down to 78% of original Value/Price.  (* Borrowers must request the removal of PMI at the point a loan is paid down to 80%.  Lenders must remove PMI at the 78% level.)
  10. Refinancing of a loan that has PMI currently, is a common way to eliminate/reduce substantially the cost of Private Mortgage Insurance.  
  11. Refinancing is especially beneficial when the Interest Rate on the Mortgage Loan can also be reduced at the same time.  (With Interest Rates currently so low (as of 8/31/2016), Refinancing for this purpose is extremely favorable and popular).


     As you can see from the info above, arriving at a decision regarding the use of Private Mortgage Insurance can be somewhat challenging for Borrowers. So it's not unusual for me to hear one or all of the following: 

  • Wow! 
  • Can I avoid PMI?
  • Can I limit its costs?
  • How can I do that? 


     The answers to the above questions will be provided in my next post.  But it's important to point out here: 

  • There IS a difference between FHA and Conventional Mortgage Insurance.  (Makes the decision even more interesting!)
  • FHA Mortgage Insurance will be addressed in a separate blog (to follow
  • Private Mortgage Insurance may be a sound viable solution if you're a hopeful home buyer wanting to buy with a small Down Payment  
  • It may be the ONLY option for you if you're a Borrower hoping to buy/Refinance with less than 20% down 
  • Entering the Chicagoland/IL/WI housing markets while interest rates are so low, borrowing money is so cheap, rents are rising quickly, and home prices may still be in reach can offset the cost of paying PMI.  Only you can decide if it's a beneficial decision for you to do so.

     

     And again, the only way to arrive at a sound decision is to contact your Chicagoland Mortgage Originator, ask questions, and gain the facts and info you need.
 
     If you're considering the purchase and/or financing of a home ... and the possible use of Private Mortgage Insurance:  Seek all the facts and answers you need to make an informed decision right for YOU ...  
 
 
 
 
     *  Hoping to Buy or Refinance a Home in New Lenox or elsewhere in the great Chicagoland area ... Illinois or Wisconsin?  Contact Me.  I'll put my 40+ years of Mortgage experience and expertise hard to work on your behalf.
     I can be easily found at: 
 
Gene Mundt
Mortgage Originator - nmls #216987 - IL Lic. 031.0006220 - WI Licensed
 
American Portfolio Mortgage Corp.
nmls #175656
 
Direct: 815.524.2280
Cell or Text: 708.921.6331
eFax: 815.524.2281
 

 

 

  

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Gene Mundt

 Mortgage Originator  -  NMLS #216987    

                                 IL Lic. #031.0006220  -  WI License #216987                                                                                                    

NMLS #175656

 

Gene Mundt, Mortgage Originator,  40+ years of #mortgage experience, will offer you exemplary mortgage service and advice when seeking:  #Conventional, #FHA, #VA, #Jumbo, #USDA, and Portfolio Loans in #Chicago and the greater Chicagoland region, including:  The #Lincoln-Way Area, #Will County, (#New Lenox, #Frankfort, #Mokena, #Manhattan, #Joliet, #Shorewood, #Crest Hill, #Plainfield, #Bolingbrook, #Romeoville, #Naperville, #Wilmington, #Peotone, etc.), #DuPage County, the City of Chicago, #Cook County, and elsewhere within IL and Wisconsin. 

 

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Comments

Another wonderful post, Gene. And you know where it is going. I always learn so much from you.

Posted by Jane Peters, Connecting you to the L.A. real estate market (Home Jane Realty) over 1 year ago

Hi Gene - As well as being an extremely informative post, this also highlights the benefits of having a highly competent and professional loan officer available for our buyers. Thanks, and have a great weekend!

Posted by Dick Greenberg, Northern Colorado Residential Real Estate (New Paradigm Partners LLC) over 1 year ago

Gene PMI can be a complicated topic, that is why Borrowers should always seek out the assistance of a Mortgage Professional like you to help them better understand it. 

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 1 year ago

You did a great job explaining it and had this very discussion today with a buyer.  She found a lender (a credit union) that doesn't require it at all if the credit score is high enough.

Posted by Debbie Reynolds, Your Dedicated Clarksville TN Real Estate Agent (Platinum Properties) over 1 year ago

Outstanding explanation about PMI, Gene!  I will definitely be sharing this with buyers - GREAT information.  Thank you!

Posted by Debe Maxwell, CRS, Charlotte Homes for Sale - Charlotte Neighborhoods (www.AtHomesCharlotte.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310) over 1 year ago

Gene,

Thank you for the excellent, educational post! It's a confusing topic for many and hard for people to explain if you're not in the Mortgage and Financing business. You have such a way with words that makes difficult topics easy to understand. 

Posted by Patricia Feager, Selling Homes Changing Lives (DFW FINE PROPERTIES) over 1 year ago

Thanks Gene.  This is an excellent primer for Private Mortgage Insurance.

Posted by Gabe Sanders, Stuart Florida Real Estate (Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales) over 1 year ago

Gene- I'm so glad you wrote this.  The other day I was trying to explain PMI to a niece and while I understand a little of it I realized that I knew nothing.  I'm directing this to her. 

Posted by Kathy Streib, Home Stager - Palm Beach County,FL -561-914-6224 (Room Service Home Staging) over 1 year ago

Thank you for an intelligent discussion regarding PMI for conventional loans.

Posted by Olga Simoncelli, CONSULTANT, Real Estate Services & Risk Management (Veritas Prime, LLC dba Veritas Prime Real Estate) over 1 year ago

This is great information Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi , its always interesting to learn more about mortgages and the many rules.

Posted by Evelyn Johnston, The People You Know, Like and Trust! (Friends & Neighbors Real Estate) over 1 year ago

Like many of your posts Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi - this is bookmarked and will share these facts with many of my buyers who come up with this question.

Thanks for this great one...

Posted by Praful Thakkar, Andover, MA: Andover Luxury Homes For Sale (eXp Realty) over 1 year ago

"PMI" was actually a company that BK'd in the meltdown.

"Mortgage insurance" ... it is supposed to make the lender whole in the event of a default. 

You would think it might benefit the borrower since they/we are the one's paying for it.

As a matter of fact, there is an insurer that will provide gap insurance or actually pay your mortgage if you are unable to do so.

 

Make it a Great Day.

Posted by Scott Thompson, Commerical Finance - Blue Springs, MO (Columbia Mortgage Plus) over 1 year ago

We see a lot of piggyback scenarios here in the Bay Area of CA, simply because of our median home prices, but where we have situations that can instead involve PMI, I always present this option to the borrower.  At higher credit scores, the rates have become so attractive and the pros can certainly outweigh the cons.  Moral of the story:  Reserve your judgment until you've considered the facts.  Great post.

Posted by Rob Spinosa, Executive Loan Advisor, Marin Mortgage Pro (Supreme Lending, Marin County, CA) over 1 year ago

Its lender's way of protecting their investment with buyer paying for it. Greatest idea ever!!!

Posted by Sham Reddy, CRS (H E R Realty, Dayton, OH) over 1 year ago

We have a lot of PMI removal as home owners started getting their LTV back to a health side.  The reduction on total mortgage is appreciable.

Posted by Sam Shueh, mba, cdpe, reopro, pe ( (408) 425-1601) over 1 year ago

Congratulations on your feature recognition. This is excellent advice to share with prospective mortgage borrowers. I will schedule a November 2nd reblog.

Posted by Roy Kelley, Roy and Dolores Kelley Photographs (Realty Group Referrals) over 1 year ago

Incredibly informative, very happy I was led to this. This is information everyone here needs to study. 

Posted by Cody Carmen, Market Analysis--Educational Content, Adhi Schools (Adhi Schools, LLC) over 1 year ago

Gene

Outstanding post on explaining Private Mortgage Insurance.

Good luck and success.

Lou Ludwig

Posted by Lou Ludwig, Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC (Ludwig & Associates) over 1 year ago

Congratulations on the featured post. I will bookmark this post and read it again.

Posted by Gita Bantwal, REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel (RE/MAX Centre Realtors) over 1 year ago

Gene, this is really an informative post. I will share it with my buyers. Thanks for posting it.

Posted by Kathy Stoltman, Ventura County Real Estate Consultant 805-746-1793 (Rockwood Realty) over 1 year ago

Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi 

You have chosen one of my greatest pet peeves about mortgage loans...PMI.  This is just another tax that shouldn't exist.  The loan should either be approved or not, there should not be a required insurance premium attached. 

Posted by Lisa Von Domek, ....Experience Isn't Expensive.... It's Priceless! (Lisa Von Domek & Associates LLC Team) about 1 year ago

Excellent and thorough post on the Pros and Cons of Private Mortgage Insurance (PMI),  Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi  ~ .  I have printed it out, will reread and also put in my special folder of valuable information.  Have a nice, Sunday. 

Posted by Jane Chaulklin-Schott, TeamConnect Luxury Homes - Orlando, Florida, 32836 (TEAMCONNECT REALTY - (407) 394-9766) about 1 year ago

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