1. What is PMI and why is it required?

Private mortgage insurance (PMI) is insurance written by a private mortgage insurance company. The purpose is to protect the lender from losses in the event you should default on the mortgage. Private mortgage insurance enables a lender to make a loan that used to be considered too risky because of the less than 20% down payment. It enables borrowers with limited to cash to be home owners. PMI is not the devil that many make it out to be. It's helped many obtain the dream of home ownership.

Typically, the minimum down payement you need to eliminate PMI is 20%. 

The Homeowner's Protection Act of 1998 allows borrowers to request cancelation of the PMI when your current property value is 80% of the lower of the original sale price or appraised value when you purchased the home. In other words, you have accumulated a 20% equity  stake in the property through property appreciation, paying down the loan, or a combination of both. You will need to contact your current loan servicer and ask them about their procedures to have PMI removed. They will typically send you the directions with a list of appraisers. You will need to have a current appraisal done by one of the lender's approved appraisers. The cost of an appraisal is about $400.

If you do not request your PMI to be removed, your lender is required to terminate borrower paid PMI when the loan reaches 78% of the original sale price or appraised value. The difference here is that the automatic removal will only be based the current blance of your home loan. It won't take into account any property appreciation.

Certain loan types will not never have PMI removed, such as investment properties. Also, PMI will not be removed sooner than two years and will not be removed if you have had any recent 30 day late payments on your loan.

4. How much does mortgage insurance cost?

There are many types of PMI programs. The cost of PMI will vary based on the borrower's credit score, down payment, property type, loan term, property location, income, debt to income ratio, assets after closing, loan program, etc. There used to be a simple chart based on down payment, now you need a computer engine to determine the cost of PMI. As a general rule of thumb a 5% down loan will cost 1%, a 10% down loan costs .6% and 15% down is about .3%. For example if the cost of the PMI was .6%, you would multiply the loan amount by the cost then divide by 12. (Example $200,000 loan X .6% =$1,200 divided by 12 months =$100/month). The example shown is for the most common type of PMI know as borrower paid monthly mortgage insurance. There are few different types of programs so it's best to speak with a laon profession to determine what PMI program is best for you.

At Allied we currently particpate in a discounted PMI program and for strong borrower's the benefit in savings can be significant. PMI can often be just as important as the interest rate when shopping for a loan. If you think you saved one eighth of a percent in your rate by going with a certain lender and up paying .25% more for PMI than Allied charges, then you just ended up paying a higher rate for your loan. This is why it's important to consider PMI costs when shopping for a loan.

5. Do lenders provide any alternative to mortgage insurance?

There are some alternative options. Explore mortgage insurance alternatives provided by Allied Mortgage Group or check out our programs that allow you to avoid private mortgage insurance altogether.

6. What is the difference between PMI and MIP? 

PMI is mortgage insurance provided for conventional loans.  MIP is insurance provided for FHA.  There is an up-front cost of 1% for FHA loans. The monthly cost is .90% for loans with less than 5% down.

7.  How long does FHA MIP last for? 

The monthly MIP will go away once you paid down your loan to 78% of the original sale price or appraised value which ever was less. Even if you make additional principal payments to reach the 78% mark, you will have to pay the monthly MIP for no less than 5 years. You can not appeal to have it removed becuase the value of your property has increased like you can on a conventional loan.

If you pay off your loan off quickly, the up front or financed MIP of 1% will be partially refunded up until the 36th month of the loan. It's done on a sliding scale and is heavily front loaded so for most people it's unlikely they will ever see a refund of the financed MIP.