Private Mortgage Insurance (PMI) and Title Insurance
Private Mortgage Insurance
Private mortgage insurance, or PMI, insures the lender against a default. It is required when the borrower is making a cash down payment of less than 20 percent of the purchase price. PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year’s mortgage insurance premium is usually paid in advance at the close of escrow, and there is usually a separate PMI approval process. Lenders generally turn to a list of companies with whom they regularly work when lining up private mortgage insurance. In most cases, PMI can be dropped after the loan to value ration drops below 80 percent. The Homeowners Protection Act requires PMI to be dropped when the loan-to- value ratio reaches 78 percent of the home’s original value AND the loan closed after July 29, 1999. For other loans, find out from your lender what procedure to follow to have PMI removed when your equity reaches 20 percent. For homeowners who have improved their properties and believe that their equity has increased as a result of these improvements, refinancing the property at a loan-to-value ratio of 80 percent or less is another possible way of eliminating PMI payments.
What does PMI cost?
PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year’s mortgage insurance premium is usually paid in advance at the closing.
Is PMI always required on low-down home loans?
A growing number of private lenders are loosening up their requirements for low-down-payment loans. But private mortgage insurance, or PMI, usually is required on 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.
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. Some state 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 value.
Generally, there are two forms of title insurance. Lender’s title insurance, required by most lending institutions, is normally written in the amount of the mortgage and protects the lending institution from losses resulting from title defects.
Because lender’s insurance expires when the mortgage is repaid, you may benefit from the second form of title insurance known as an owner’s title policy. It usually is written for the amount of the purchase price of the home. This protection starts the day of the closing and lasts as long as you or your heirs retain an interest in the property.
Unlike other insurance premiums, your title insurance premium is paid only once, at the closing. By purchasing owner’s and lender’s protection simultaneously, substantial savings in title insurance premiums can be realized. After all fees have been paid and documents signed and notarized at the closing, you will receive a copy of each and, most importantly, title to your house.