Private Mortgage Insurance in Pennsylvania

Anyone considering buying a home in Pennsylvania should look closely at private mortgage insurance (PMI).

Most lenders require PMI when a borrower puts down less than 20% on a property to protect themselves from potential losses.

The specifics of PMI can vary based on factors like loan size, type, credit score, and employment history.

What is Private Mortgage Insurance (PMI)?

Private mortgage insurance (PMI) is a type of insurance that safeguards the lender if a borrower defaults on their mortgage loan. Typically mandated when a borrower makes a down payment of less than 20% on a conventional loan, PMI enables borrowers to qualify for loans they might not otherwise afford, albeit at an extra cost.

PMI covers the gap between the amount borrowed and the lender's standard minimum down payment requirement, usually ranging from five to 20 percent of the purchase price. Costs vary based on factors such as credit score, loan size, and term but generally fall between 0.3 and 1.5 percent of the total loan amount, paid in addition to monthly mortgage payments.

When is PMI Required?

Most lenders mandate PMI if a borrower's down payment is less than 20%. If a borrower puts down less than one-fifth of the home's total cost, PMI will likely be required until they accrue enough equity in the property. The exact percentage required varies by lender but typically falls between 15% and 20% of the total cost.

PMI also applies to buyers with good credit who put down less than 20%, as many lenders have heightened standards due to prevailing market conditions.

How Much is PMI?

Understanding all associated costs when considering a home loan is crucial. One such cost is private mortgage insurance (PMI), an additional fee that safeguards the lender in the event of borrower default. For conventional loans, PMI typically ranges from 0.3% to 1.5% of the total loan amount annually and can be paid monthly or as a lump sum at closing.

The precise PMI amount hinges on factors like credit score, down payment amount, and loan program type. Generally, borrowers with lower credit scores incur higher PMI premiums since they pose a greater risk to lenders.

PMI Plans Explained

Various payment options include:

Borrower-paid (monthly) mortgage insurance: Under this arrangement, borrowers include the cost of mortgage insurance premiums in their monthly mortgage payments. These payments cover the principal and interest and allocate funds towards insurance costs, which are then disbursed regularly to the insurer. This method allows borrowers to spread out the insurance expenses over the life of the loan, making it easier to manage their finances.

Lender-paid mortgage insurance (LPMI): In the case of lender-paid mortgage insurance (LPMI), the lender assumes the responsibility of paying the mortgage insurance premiums on behalf of the borrower. To compensate for this, the lender typically charges a higher interest rate on the loan. This means that while borrowers may not see a separate line item for mortgage insurance on their monthly statements, they indirectly cover the cost through a slightly elevated interest rate over the loan term.

Single-premium mortgage insurance: With single-premium mortgage insurance, borrowers make a one-time payment to cover the entire insurance cost upfront. This payment can either be made at the time of closing or rolled into the loan amount, allowing borrowers to finance the insurance premium over the life of the mortgage. Opting for a single-premium plan can offer upfront cost savings compared to spreading the insurance expense across monthly payments.

Split-premium mortgage insurance: Split-premium mortgage insurance involves an upfront fee that the borrower pays to lower the monthly mortgage insurance payments. By spending a portion of the insurance premium upfront, borrowers can lower their monthly mortgage payments over the life of the loan. This option provides borrowers with flexibility in managing their cash flow, allowing them to choose between paying more upfront to reduce ongoing expenses or spreading out the costs evenly over time.

Calculate Your PMI Cost

The monthly payment plan, the most popular PMI plan, includes the cost of private mortgage insurance in the monthly mortgage payment. The following table illustrates the price of this insurance for a fixed-rate loan with a term of more than 20 years.

The left column (LTV) is the down payment (or principal) amount. (97% means a 3-4.99% down payment, and 95% indicates a 5% down payment. 90% means a 10% down payment, and 85% represents a 15% down payment.

You will notice that the cost of PMI increases as your credit score decreases.

The left column (LTV) is the down payment (or principal) amount. (97% means a 3-4.99% down payment, and 95% indicates a 5% down payment. 90% means a 10% down payment, and 85% represents a 15% down payment.

You will notice that the cost of PMI increases as your credit score decreases.

Benefits of PMI

PMI allows buyers to secure financing with a smaller down payment, typically ranging from 3-5% for conventional loans compared to the traditional 20%, freeing up funds for other expenses associated with buying a home.

Drawbacks of PMI

While PMI aids those unable to afford a standard 20% down payment, it comes with added costs, ranging from 0.3% to 1.5% of the original loan amount annually until the loan-to-value ratio reaches 78%. This can diminish a borrower's overall purchasing power or place them in a riskier financial position than without PMI.

Alternatives to PMI: Piggyback Loans

Piggyback loans offer an appealing alternative for homeowners unwilling to pay for PMI. By obtaining two separate loans, one primary, and one secondary, borrowers can cover up to 100% of the purchase price, circumventing the need for PMI while still accessing favorable financing terms.

When Does PMI Go Away?

The Homeowners Protection Act of 1998 outlines precise conditions under which PMI can be removed from a homeowner's mortgage loan. According to this legislation, PMI can typically be canceled once the homeowner achieves a loan-to-value ratio of 78%, either through regular mortgage payments or an increase in the property's value.

Additionally, the borrower must be current on their mortgage payments and have a satisfactory payment history. However, for certain loans, such as those considered high-risk, PMI may be required for the entire term, regardless of equity accumulation. Therefore, homeowners must review their loan terms and consult with their lender to determine when PMI can be removed.

Conclusion

In conclusion, understanding PMI is vital for anyone planning to purchase a home in Pennsylvania. Because it impacts loan terms and costs, borrowers should carefully evaluate their options and financial circumstances before proceeding with a mortgage.

SOURCE:
Mortgage Guaranty Insurance Corporation (MGIC)
Consumer Financial Protection Bureau