What You Need to Know About Private Mortgage Insurance (PMI)

December 3, 2013

Private mortgage insurance, or PMI, is a type of insurance that is usually required by a mortgage lender when the borrower is unable to put at least 20 percent down for their home purchase. Borrowers who have to pay PMI usually are required to do so until they have built up 20 percent equity in their home. It’s fairly common practice, and most new homeowners are faced with having to pay PMI for the first few years of their mortgage. However, there are a few things about PMI that you may not be aware of. Like how to cancel PMI, or whether or not you can avoid PMI by taking out certain types of government loans. In this post, we’ll go over these topics and more to help you have a better understanding of private mortgage insurance.

Who does PMI protect?

PMI is paid for by the borrower, but the policy protects the lender. If the borrower fails to make payments on his or her mortgage, the PMI policy will cover the lender from substantial loss.

What’s in it for the borrower?

Borrowers can benefit from PMI because it allows them to finance more than 80 percent of the home’s purchase price. In other words, it allows them to put less than 20 percent down, which can be a blessing for first time home buyers or buyers who do not have a lot of cash saved up for a down payment.

How can I eliminate PMI?

If your lender required you to pay PMI, you will likely have to continue paying it until you’ve built up 20 percent equity in your home. Equity can be built by paying toward the loan’s principal, by the value of the home appreciating, or both. Depending on your lender, they may notify you once you’ve established 20 percent equity or you may have to keep track of it yourself and request cancellation of PMI.

If your loan balance reaches 80 percent of the original value when you first obtained the loan and you request your lender terminate your PMI, they are required to do so, thanks to the Homeowners Protection Act of 1999. Once your loan balance falls to 78 percent, PMI will be cancelled automatically.

Will I need an appraisal?

Before your lender allows you to cancel PMI, they may ask you to have a professional appraisal conducted to verify that the home is worth at least 20 percent more than what you owe on it. This is especially common when the homeowner builds equity due to the home value appreciating.

Is PMI tax deductible?

According to HouseLogic, not deducting PMI is one of the top mistakes homeowners make when they do their taxes. But before you get too excited, not every homeowner qualifies for the deduction. According to HouseLogic, you must meet the following criteria in order to qualify for the deduction:

  • You got your loan in 2007 or later
  • Your mortgage is for your primary residence or second home that is not a rental property
  • Your adjusted gross income is no more than $109,000. The deduction begins to phase out once your adjusted gross income (AGI) exceeds $100,000 ($50,000 for married filing separately) and disappears entirely at an AGI of more than $109,000 ($54,500 for married filing separately)

There may be other special requirements to file a PMI deduction. For instance, you may have to itemize and use a Schedule A form.

Please note that the mortgage professionals at eLEND are not tax experts. Talk to a tax advisor for more information and to find out the exact requirements for PMI tax deduction. 

Do government loans require PMI?

FHA loans and VA loans do not require PMI per se, but they do have their own versions of mortgage insurance that the borrower is responsible for paying. With FHA loans, borrowers must pay mortgage insurance for loans that finance more than 80 percent of the home’s value. This is very similar to PMI, but the FHA’s mortgage insurance is paid in part with an Up-Front Mortgage Insurance Premium and also a recurring Annual Mortgage Insurance Premium. The cost of these premiums can vary. The amounts can depend on the amount of the down payment, the length of the loan term and when the loan was taken out, among other factors. Likewise, the point at which the FHA loan’s mortgage insurance can be cancelled will depend on various factors.

As for USDA Rural Housing loans and VA loans, neither of these programs require monthly mortgage insurance; however, they do charge an up front fee at the time of closing. Talk to a mortgage expert from eLEND for details on any of these special home financing programs.

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