November 1, 2017
Understanding Private Mortgage Insurance (PMI)
LendingTree quoted me in Guide to Understanding Private Mortgage Insurance (That’s PMI). It opens,
Part I: Basics of private mortgage insurance (PMI)
What is PMI?
If you’ve ever purchased a home without a large down payment, you may have faced the possibility of paying PMI, or private mortgage insurance. This financial product is a type of loan insurance typically bought by consumers when they purchase a house. However, the premiums paid toward PMI aren’t intended to protect the consumer. Rather, they provide protection for the lender, in case you stop making payments on your home loan.
As the Consumer Financial Protection Bureau (CFPB) notes, PMI is typically arranged by your lender during the home loan process and comes into play when you have a conventional loan and put down less than 20 percent of the property’s purchase price. However, private mortgage insurance is not just associated with home purchases; it can also be required when a consumer refinances his or her home and has less than 20 percent equity in it.
Generally speaking, PMI can be paid in three different ways — as a monthly premium, a one-time upfront premium or a mix of monthly premiums with an upfront fee.
There are also ways to avoid paying PMI altogether, which we’ll address later in this guide.
PMI versus MIP: What’s the difference?
While PMI is private mortgage insurance consumers buy to insure their conventional home loans, the similarly named MIP – that’s mortgage insurance premium — is mortgage insurance you buy when you take out an FHA home loan.
MIP works kind of like PMI, in that it’s required for FHA (Federal Housing Administration) loans with a down payment of less than 20 percent of the purchase price. With MIP, you pay both an upfront assessment at the time of closing and an annual premium that is calculated every year and paid within your monthly mortgage premiums.
Generally speaking, the upfront component of MIP is equal to 1.75 percent of the base loan amount. The annual MIP premiums, on the other hand, are based on the amount of money you owe each year.
The biggest difference between PMI and MIP is this: PMI can be canceled after a homeowner achieves at least 20 percent equity in his/her property, whereas homeowners paying MIP in conjunction with a FHA loan that originated after June 13, 2013, cannot cancel this coverage until their mortgage is paid in full. You can also get out from under MIP by refinancing your FHA loan into a new, conventional loan. However, you’ll need to leave at least 20 percent equity in your home to avoid having to pay private mortgage insurance on the refi.
Which types of home loans require PMI? MIP?
If you’re thinking of buying a home and wondering if you’ll be on the hook for PMI or MIP, it’s important to understand different scenarios in which these extra charges may apply.
Here are the two main loan situations where you’ll absolutely need to pay mortgage insurance:
- FHA loans with less than 20 percent down – If you’re taking out a FHA loan to purchase a home, you may only be required to come up with a 3.5 percent down payment. You will, however, be required to pay both upfront and annual mortgage insurance premium (MIP).
- Conventional loans with less than 20 percent down – If you’re taking out a conventional home loan and have less than 20 percent of the home’s purchase price to put down, you’ll need to pay PMI.
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Part V: Frequently asked questions (FAQs)
Before you decide whether to pay PMI – or whether you should try to avoid it – it pays to learn all you can about this insurance product. Consider these frequently asked questions and their answers as you continue your path toward homeownership.
Q. Is PMI tax-deductible?
According to David Reiss, professor of law and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School, PMI may be tax-deductible but it all depends on your situation. “The deduction phases out at higher income levels,” he says.
According to IRS.gov, the deduction for PMI starts phasing out once your adjusted gross income exceeds $100,000 and phases out completely once it exceeds $109,000 (or $54,500 if married filing separately).| Permalink