Mortgage lenders generally require private mortgage insurance (PMI) on loans they consider high risk. The factors taken into consideration are your credit score, the amount of your down payment and the appraised value of the home. PMI can raise your monthly mortgage payments and reduce your ability to borrow, but for those who don’t have 20 percent or more to put down on a home, it’s a necessary evil. PMI has evolved over the years, but some of the changes’ nuances aren’t widely known. Here are the facts behind five of the biggest myths about private mortgage insurance keep you in the know as you search for your dream home.
Myth #1: I’ll Have to Pay PMI Until I Reach 20 Percent Equity In My Home
There are three ways to get to that magic number where you can cancel your private mortgage insurance:
- You pay the required 20 percent of the home’s original value;
- Your home’s value increases, which raises your equity stake to 20 percent or more; or
- You reach the mid-point of your mortgage.
If you purchase a home for $300,000 and put down eight percent (or $24,000), you will probably be required to pay for PMI. Let’s say you take out a $276,000 mortgage loan with a four percent interest rate, it would take you roughly 6.5 years before you hit that magic 20 percent equity. You always have the option, however, of paying a bit extra each month toward the principal balance. An extra $100 per month would reduce the time to roughly five years.
If your home’s value increases before you’ve paid the equivalent of that 20 percent, you may be able to cancel your PMI. On that same mortgage, perhaps your home’s value increases from $300,000 to $350,000 at the beginning of year four. Even though you still owe $255,337 on the home, the increase in the home’s value means that you have almost $95,000 in equity, or closer to 25 percent.
For non-conventional loans, such as interest-only loans or notes with balloon payments, the Homeowner’s Protection Act states that the lender must terminate the PMI at the mid-point of the mortgage term, even if that 20 percent requirement has not been met.
Myth #2: I Have to Wait for the Lender to Cancel My PMI
Per the Homeowner’s Protection Act, your mortgage lender must automatically cancel your private mortgage insurance  as soon as your equity reaches 22 percent of the home’s original purchase price regardless of any increase or decrease in the property’s value. As soon as your equity reaches 20 percent, however, you can ask your lender to cancel it. It doesn’t matter whether you’ve reached the 20 percent (or higher) mark due to normal mortgage payments, additional principal payments, natural appreciation in the home’s value due to market increases or home appreciation due to additions or renovations you’ve completed on the home.
Your lender will require that certain conditions be met in order to cancel the PMI before your equity reaches 22 percent:
- You must make your request in writing
- You must have a good payment history on the loan and payments must be current
- There can’t be any liens on the home, such as a home equity loan or line of credit, that impact your equity
- You may be required to pay for an appraisal to prove that the current value of the home supports your 20 percent equity claim
If your current lender says you don’t meet its criteria to drop the PMI, it may be worth it to look for another lender to refinance your loan. If you truly do have enough equity, you may not be required to pay private mortgage insurance on the new loan. Make sure that what you spend refinancing doesn’t exceed the amount you would have spent on PMI on your current mortgage, or you may not be making a smart financial move.
Myth #3: All Mortgages Require PMI if I Put Less Than 20 Percent Down
Most conventional mortgages require PMI if you make a down payment of less than 20 percent, but that doesn’t apply to all mortgages. If you have a solid credit history and are putting down at least 10 percent on your home, you may qualify for lender-paid private mortgage insurance (LPMI). In this scenario, the lender pays the PMI premium up-front and then passes some or all of the cost along to you in the form of a higher interest rate. The interest rate hike is generally half a percent or less, but you should do the math to determine whether PMI or LPMI is your best bet. If you’re planning on making renovations to the home that will increase its value quickly, your may be better off going with PMI, which you may be able to cancel early.
Even though VA loans do not require any minimum down payment, there is no PMI required. If you qualify for a VA loan, it’s well worth looking into. FHA loans don’t require PMI, but they do require MIP. or mortgage insurance premiums. These are similar to the PMI you find with conventional loans, but with one crucial difference—MIP cannot be canceled. It’s in place for the life of the loan. The only way around the MIP with an FHA loan is to refinance.
Myth #4: PMI is Always Tax-Deductible
While this is true right now, it might not be true in the future. Congress made PMI tax-deductible in 2007, and it’s been that way ever since. However, this is one of those provisions in the tax code that expires at the end of each year. Congress has been extending it at the last minute each year, but it’s still a toss-up whether it will be tax-deductible the following year. If you’re lucky enough to be able to claim your PMI for the year, consider it icing on the cake. You may not be able to deduct it next year.
Myth #5: PMI Protects the Home Owner and the Lender
Private mortgage insurance is designed to protect the lender in case you default on the loan. Do not mistake this for any protection on your behalf. Even if you pay your PMI each month, your lender can still foreclose on your home if you get behind on your payments.
