What is Morgage PMI - Private Morgage Insurance

What is Morgage PMI?

Private Morgage Insurance, also known as Lenders Morgage Insurance, is insurance that is payable to a lender and is often required for loans with a 'Loan to Value' above 80%. This insurance is designed to protect the holder of the morgage in the event that the borrow defaults on the loan and the lender is not able to recover the cost of the loan after foreclosing and selling the property.

The actual cost of Morgage PMI is generally tied to the Loan Amount and the 'Loan to Value' of the morgage (the higher the Loan to Value the higher the insurance premium). Other factors can also affect it, including occupancy (Investment Property, Second Home or Primary Residence) and credit score. It is generally paid on a monthly basis though it can also be paid annually or all at once.

Morgage PMI is not a permanent expense associated with the loan. It can usually be removed once the principal balance is reduced to 80% of the property's value. This can happen by paying down the loan balance, the appreciation of the property's value, or a combination of both. Note that some lenders will still actuall require that Morgage PMI be paid for set number of years (such as two, three or five years) even if the loan balance reaches 80% prior to that. Legally, though, there is only an obligation to remove the Private Morgage Insurance once the loan has been paid down to 78% of the original loan amount/purchase price and some lenders adhere to this in spite of the Loan to Value.

How can PMI be cancelled or removed? This is generally done by having the Servicer of the morgage send a cancellation request to the company that issued the morgage insurance. In order to have this done on your behalf the Servicer may ask for a new appraisal to determine the Loan to Value.

How can you avoide PMI? The easiest way to avoid PMI is by doing two loans at the same time---what is often referred to as a 'Piggyback Loan'. Basically, you will have a 1st Morgage at 80% LTV and then use a 2nd Morgage to cover the remaining loan amount. For example, if you are buying a home for $100,000 and are only putting $10,000 down you could do the following: Have a 1st Morgage at $80,000 and then a 2nd Morgage for $10,000 (instead of doing one loan for $90,000). This would keep you from paying PMI on your 1st Morgage because the LTV is only 80%. Various combinations of 1st and 2nd Morgages can be utilized to help you avoid paying PMI and you should consult your loan officer to determine which is best for you.

Is Morgage PMI Tax Deductible? The short answer is...yes! PMI because Tax Deductible in 2007. The law that permitted this applies to morgage contracts issued January 1, 2007 and before January 1, 2010 (they'll have to renew the law after 2010 in order for PMI to remain tax deductible). It should be noted that this law does not cover loans that were executed prior to these dates.

Other Important Morgage Terms

Prepaid Expenses - Insurance, Taxes & assessments paid in advance of their due dates, usually at closing.

Prepaid Interest - Charged to a borrower at closing to cover interest on the morgage between closing and the 1st payment. Morgage Principal - The amount of debt, not counting interest, left on a morgage.

Property Tax - A government tax based on the market value of a property.

Purchase Agreement - Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Private Morgage Insurance & PMI Information