Real Estate Guide

Your Mortgage - Questions and Answers
'Private Mortgage Insurance (PMI)'

• What is PMI?
• Is PMI always required on low-down home loans?
• What does PMI cost?
• Is PMI Tax Deductible?
• How do I drop PMI?

What is PMI?

Private mortgage insurance, or PMI, insures the lender against a borrower's default. It helps the lender in situations when a foreclosure sale might not bring enough money to pay off both the mortgage and the cost of the foreclosure. It is only required when the borrower is making a cash down-payment of less than 20 percent of the purchase price. The PMI premiums are usually then added to the borrower's monthly payment. The loan servicer collects the monthly premium and pays it to  the PMI insurer.

The first year's mortgage insurance premium is usually paid in advance at the close of escrow, and there will usually be a separate PMI approval process.

See also >>

• pmigroup.com
• Mortgage Insurance 101, (pdf) by David Katkov
• Download the 2008-2009 Fact Book , from Mortgage Insurance Corporation of America
• "Consumer Guide To Private MI" from http://www.privatemi.com/.

Is PMI always required on low-down home loans?

A growing number of private lenders loosened their requirements for low-down-payment loans during the go-go real estate years 2000 through 2005. However, you'll find that now private mortgage insurance, or PMI, usually is required on all loans with less than a 20 percent down-payment.

The Homeowners Protection Act states PMI must be dropped on any loan originated after July 29, 1999 IF it has a 78 percent loan-to-value ratio.

What does PMI cost?

Private mortgage insurance costs vary from one mortgage insurance firm to another, but premiums usually run about 0.5 percent of the loan amount for the first year of the loan, and slightly less for subsequent years. The first year's mortgage insurance premium is usually paid in advance at the closing.

Is PMI Tax Deductible?

New in 2007, homeowners earning under $110,000 adjusted gross income can deduct, for the 2007 tax year only, some or all of the PMI premium on mortgages closed only in 2007. Congress would need to renew this deduction to be valid for any tax years beyond 2007. (Consult with your attorney or tax accountant.)

Important Note: the Mortgage Debt Cancellation Relief Act extends the PMI deduction mortgage insurance premiums through tax year 2010.

 See Also >> - More questions and answers concerning PMI and taxes here.

How do I drop PMI?

In some states, the loans have to be at least two years old, and the borrower cannot have made any late payments in the last year in order to drop private mortgage insurance. In addition, the loan-to-value ratio must be less than 75 percent.

In Ohio, disclosure laws require lenders to notify borrowers after the close of escrow whether the borrower has the right to cancel private mortgage insurance. Under the new federal law - The Homeowners Protection Act - lenders must drop PMI if the loan closed after July 29, 1999 AND the loan to value ratio reaches 78 percent of the home's original market value. See the resource listed below for a full discussion of the HPA Law and how it may apply to you.

See also >>

• "Private Mortgage Insurance (PMI); New Law Requires Lenders to Cancel PMI,"  The Board of Governors, Federal Reserve System.