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Insurance Coverage Tips > Insurance > Private Mortgage Insurance - PMI
Private Mortgage Insurance - PMI
Private Mortgage Insurance (PMI), is insurance payable to a lender when taking out a mortgage. It is an insurance in the case that the mortgagor is not able to repay the loan, and the lender is not able to recover its costs after foreclosing the loan and selling the mortgaged property.
The Private Mortgage Insurance may be payable up front, or it may be capitalized onto the loan.
This type of insurance is usually only charged if the downpayment is less than 20% of the sales price or appraised value (in other words, the LTV or loan to value ratio should be 80% or less).
Once the principal reaches 80%, the Private Mortgage Insurance is no longer required. Cancelling mortgage insurance can be a difficult process. Sometimes lenders will require that Private Mortgage Insurance be paid for a fixed period, even if the principal reaches 80%.
The cancellation request must come from the Servicer of the mortgage to the Private Mortgage Insurance company who issued the insurance. Oftentimes the Servicer will require a new appraisal to determine the LTV.
The cost of mortgage insurance varies considerably based on several factors which include: loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most of all, credit score.
If a borrower has less than the 20% downpayment needed to avoid a mortgage insurance requirement, they might be able to make use of a second mortgage (sometimes referred to as a "piggy-back loan") to make up the difference .
Two popular versions of this lending technique are the so-called 80/10/10 and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a 10% downpayment, and an 80/15/5 program uses a 15% LTV second mortgage with a 5% downpayment.
Other combinations of second mortgage and downpayment amounts might also be available.
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