It has almost become impossible to avoid purchasing the private mortgage insurance since the lenders have mandated its requirement for forwarding a mortgage loan. The PMI was initially designed to enable the homeowners with limited funds to obtain a house.
Private Mortgage Insurance safeguards the interest of the lender when the borrower defaults. It ensures that the loan will get repaid if a tragedy like- death, disability or unemployment, strikes the borrower at any point during the term of the loan.
The mortgage insurance remains as a condition to qualify for the mortgage loan for the borrowers making 20% or less of the property value as down payment, and sticks with them till they accumulate 80% equity on their properties. After that it remains a choice for the borrower to continue or to drop the coverage.
Disadvantages of PMI
The biggest disadvantage of PMI is that it increases the cost of the loan. The factors that determine the cost of the PMI are
- The amount of the loa
- The amount of the down payment
- The credit history of the applicant
A borrower with a bad credit score is likely to face difficulties in securing a mortgage loan, and the cost of the insurance is likely to be high for him as well. Similarly, a property in the high-risk area will attract higher premium for mortgage insurance.
How can you avoid paying PMI
You may not stand many chances to avoid private mortgage insurance when obtaining a mortgage loan; however, technically you can avoid the PMI
- By putting more than 20% of the value of the property as down payment at the time of purchasing it.
- By taking out two loans, first one on the 80% of the value of the property and second one on the difference between the remaining 20% of the property value and the amount of down-payment.
Homeowner’s Protection Act (HPA)
The Homeowners Protection Act is enacted to secure the interest of the homeowners. This law guarantees that the homeowners can request the lender to drop the PMI once he acquires 80% equity on the property. The followings are the highlights of the HPA
- The homeowner can request for the termination of the private mortgage policy once he has paid down 80% of the loan amount, provided he has maintained good repayment record and have no late payment in his record.
- The lender should automatically cancel the policy once the borrower repays 78% of the loan amount.
- The private mortgage policy will finally get terminated when the loan reaches the midterm of its amortization period.
- The HPA is designed to safeguard the interest of the borrowers. However, it doesn’t apply to VA, FHA or any other government supported loans. Also, it doesn’t apply to the ‘high-risk’ loans, where the lender may require the homeowner to maintain the coverage throughout the life of the mortgage.