Private mortgage insurance (PMI) insures the lender, not you when you buy a home with a down payment of less than 20 percent. It protects their interest in the event you default on your loan and is a requirement by lenders on loans provided to borrowers, with less than 20 percent as a down payment, toward the purchase of a home. So, essentially you are paying an insurer to protect the banks interest on your mortgage if your down payment is less than 20 percent because they are the ones taking the risk on your viability as a borrower.
Private mortgage insurance has come and gone at lending institutions since the late 1800’s. At times, it has advanced the purchase of homes at others it has been the victim of economic booms and busts. Until the Homeowners Protection Act of 1998 was enacted in 1999, lenders would charge PMI mortgage insurance to borrowers for the full term of their loan, even after they had a loan-to-value (LTV) ratio of 78 percent. Today, a lender is required to remove PMI when that ratio is met; however, you will need to ask them to do so.
Who are the seven U.S. Mortgage Insurers?
Today, seven U.S. mortgage insurers provide protection to lenders across the country and enable borrowers to afford a home that they may otherwise never qualify to purchase. The seven U.S. Mortgage insurers are:
- Arch Capital Group – is a Bermuda public limited liability company. They write insurance on a worldwide basis and mortgage insurance is one of their many products. The Arch Capital Group, who writes Arch mortgage insurance, has a long history of the world that began in the late 1990’s and continues today.
- Essent Guaranty – is another Bermuda-domiciled holding company who, through its subsidiaries, offers mortgage insurance, risk management products, and reinsurance to investors and mortgage lenders, worldwide.
- Genworth Financial – is a company that began when they wrote their first insurance policy in 1871, followed later by their first annuities in 1928. Genworth Financial began writing mortgage insurance policies in 1961. They have a deep history of helping businesses and communities.
- MGIC – The Mortgage Guaranty Insurance Company was inspired in 1957, by Max Karl and was funded by investors for the pure intent of insuring private mortgages that did not meet the loan-to-value ratios required by lenders.
- National Mortgage Insurance – Another company born from investments of $550 million to fund the needs of mortgage insurance for lenders National Mortgage Insurance is one of the newest mortgage insurance companies to bring this service to market.
- Old Republic International – is another company offering PMI mortgage insurance that has deep roots in the insurance industry. With 139 subsidiaries, and 27 insurance subsidiaries in 50 states, three US territories and all of Canada, Old Republic International’s companies provide risk management, market, and underwrite many different types of insurance coverage, including PMI mortgage insurance and title insurance.
Radian Guaranty, Inc. – With roots back to 1977, by its parent company CMAC, the company became Radian by way of a merger with Amerin in 1999. They are providers of PMI mortgage insurance, risk management products, and other services to lenders, nationwide.
Why is PMI necessary?
The inability for a borrower to buy a home with less than 20 percent down has long been an impediment for them to move up in society. Homeownership can increase a person’s personal wealth and ability move up to a better future. Private mortgage insurance allows lenders to close that gap and give more buyers the potential to buy a home. Banks are willing to take a risk on a lending 80 percent of the value of a home because even if the buyer defaults, they will be likely to get their money back on the sale of the home.
However, lenders are not willing to lend a 100 percent on a home because the risk of loss is too, great. That is where mortgage insurers come in. It closes the gap for the lender and allows borrowers with lower down payments to buy a home if they meet the other qualifiers necessary to obtain a mortgage.
How much will PMI mortgage Insurance cost you?
The average cost of PMI is one-half to one and a half percent of the loan amount, figured on an annual basis. This means that a loan of $200,000 could cost you an additional $3000 per year at the higher rate. That comes to $250 a month that you could use elsewhere if it wasn’t going to your mortgage. If local property rates increase, you may be able to have the PMI mortgage insurance removed from your loan once you reach an LTV of 78 percent. This will require an appraisal that may or may not help. You can always increase your monthly payments and pay to principal if you are able to do so, which will further aid your LTV.
So, how do you get around this cost? If you are eligible for a VA loan, the U.S. government guarantees your loan so you will not have a PMI mortgage insurance payment. You will have a funding fee that is paid at the inception of the loan and PMI is not a part of the deal. USDA loans also offer mortgages without PMI, if you live in an eligible rural area.
Why does this matter to you?
There is a lot of money in servicing housing mortgages and those who offer PMI know this. Why else would investors pour billions of dollars into writing these policies for the lenders? They have benefited many homeowners who would have never been able to buy, otherwise. However, there are ways to eliminate or shorten the period that you pay PMI. Like with any real estate transaction, know your options and carry out your due diligence.
2 Point Highlight
Private mortgage insurance (PMI) insures the lender, not you when you buy a home with a down payment of less than 20 percent.
Private mortgage insurance has come and gone at lending institutions since the late 1800’s.
