What is Private Mortgage Insurance, and why is it bad?

What Is Private Mortgage Insurance?

What Is Private Mortgage Insurance?

This is for informational purposes regarding PMI. Be advised that there is absolutely NO PMI of any kind through the NACA program.

When is mortgage insurance required?

Borrowers who take out conventional loans (those not guaranteed by the government) and are unable to come up with a 20% down payment, or simply don’t want to, must pay “private mortgage insurance,” also known as PMI, to obtain a mortgage. Of course, not through the NACA program, as they have exclusive agreements with Citi Mortgage, there is NO PMI required.

PMI required by the bank or lender providing financing if the loan-to-value, or LTV, is greater than 80%. So those who fail to come up with a 20% down payment are stuck paying PMI.(unless you go through the NACA program, remember there is NO DOWN PAYMENT required with a NACA loan)

Like other forms of insurance, you pay a premium for PMI coverage, which is often bundled into your mortgage payment.

Some lenders may tell you that mortgage insurance isn’t required even if your LTV is above 80%, but it’s likely just factored into the (higher) interest rate. So you still pay it, just not directly. They still get you one way or another, but not through the NACA program.

What is private mortgage insurance for?

PMI protects the originating bank or lender when a borrower with a very high LTV defaults on their mortgage. That’s right, PMI is insurance for the bank, not for you.

If you default on a loan with PMI in-force, the lender will receive a payout from the private mortgage insurance company to cover the associated losses.

Private Mortgage Insurance is like burning money. It does not benefit you in any way, unless you plan on foreclosing on the loan you’re about to take out.

NACA loans rarely every go into default(something like 1/10th of 1%), so why pay PMI?

How much does private mortgage insurance cost?

The cost of private mortgage insurance can vary greatly and carries its own pricing adjustments, just as the associated loan will.

In other words, your LTV, credit score, the size of the loan, the amount of coverage, transaction type (refinance vs purchase), loan type and premium type can all come into play.

The greater the combined risk factors, the higher the cost of PMI, similar to how a mortgage rate rises as the associated loan becomes more high-risk. Individuals who go through the NACA program are extremely low risk to default on their mortgage.

Mortgage insurance premiums typically range from $250 to $1,200 per year, though it’s not uncommon to pay several hundred a month for coverage if you’ve got a large loan amount and very little down payment. It all varies on loan amount, down payment, etc.

Let’s look at a quick example:

$400,000 purchase price
$380,000 loan amount
95% LTV
0.70% of loan amount for annual mortgage insurance premium (paid monthly)

In the scenario above, you’d be looking at a cost of $221.66 per month for coverage. That’s a waste of $221.66.

380,000 x .007 = 2660 / 12 months = $221.66 per month.

If the mortgage is above 95% LTV, the annual mortgage insurance premium might increase to something like 0.90%. In general, a higher LTV equates to higher risk and premium.

Keep in mind that PMI can also be paid upfront or by the lender instead, with the latter resulting in a higher mortgage interest rate as a result.

The Homeowners Protection Act of 1998 (How to Get Rid of Mortgage Insurance)

I’m assuming the most popular question with regard to private mortgage insurance is how to cancel it? Fortunately, there are many ways it can be canceled.

In the past, homeowners continued to pay PMI even after their LTV fell below 80% because the banks and mortgage lenders were not required to notify borrowers. It used to be the responsibility of the borrower to cancel PMI once they reached the 80% LTV mark, but recent laws have forced the banks and lenders to take responsibility as well.

Automatic Termination of PMI Payments

All the confusion led to the Homeowners Protection Act of 1998, which established rules regarding termination of private mortgage insurance on principal residences.

How can I avoid mortgage insurance altogether?

Well, with a regular conventional loan, or with a FHA loan, you may come to the table with a hefty 20% down payment.

Why deal with any of this mess? PMI goes a lot more in dept than this. It has been known that with FHA loans PMI could last the life of the loan, unless you decide to re-finance your mortgage.

The NACA program truly is one of a kind. Not only do they require NO DOWN PAYMENT, there is also NO CLOSING COSTS as well.

Don’t pay the hefty premium for private mortgage insurance. There is a better way!

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Author: Kristopher Fraley , Realtor

A few years ago a serendipitous event(purchasing a home through the NACA program with a 0% 30 year fixed interest rate) inspired me to become a licensed NACA approved real estate agent in the DC, Maryland & Virginia area, and I love it! There is nothing greater than giving back and its a fantastic process that I feel lucky to participate in. With so many money hungry sharks preying on innocent people in the real estate industry, I feel honored when people trust my team to help them obtain the best terms on a mortgage possible. I can be reached by emailing kris@no-downpayment.com

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