Pmi

[saversaba08]

I was wondering what the real purpose of the Private Mortgage Insurance (PMI) is? From what I have read, homebuyers who put down less than 20% are required to take this on, then shouldn't it kick in when they are unable to make payments... and should it then not prevent foreclosure? Obviously, I am missing something because if this were the case then instead of a subprime mortgage crisis we would be in the midst of a run on the PMI companies Any thoughts?

[geojen]

From what I understand, PMI doesn't protect you, it protects the bank if you default on your mortgage.

[sweeps]

Relevant article: Mortgage Insurance Companies Feel the Pain

[saversaba08]

Thanks for the quick replies. The article makes sense but then should this not be bigger news, i.e the mortgage insurance companies being in trouble? Why are the bank's and lender's bottomlines taking a hit then assuming that most subprime borrowers would have had to take on PMI that would cover them (the banks) in the event of foreclosure?

[sweeps]

I don't have any stats, but I'm guessing it hasn't been as big of a hit to these companies as you might think:
1. Even though foreclosures have gone up, they're still a pretty low percentage of outstanding mortgages.
2. The government has been taking various actions to reduce/delay foreclosures.
3. They're only covering a portion of the risk of foreclosure. The primary mortgage company takes the brunt of it.
4. PMI isn't cheap. These companies get a lot of revenue from monthly PMI payments.

[myrdale]

PMI is there to cover the lender. If you default on the loan and the bank forecloses, they are still out of the money you owe them. The PMI pays the bank the money that you owed. Your paying their insurance basically.

Also when PMI goes away varies. From what I have read it usually is written off once the principle on the house reaches 20 to 25%. With my mortgage though FHA, the PMI will not go away until you hit that 20% AND you have had the mortgage for 5 years I believe. Thats a real bummer on my part. I will be talking to them about dropping it soon, but I am not counting on it.

[maat55]

I was fortunate that, though I didn't put 20% down, I was kinda close so I only pay 19 a month for the pmi on a 120,000 loan.

[jIM_Ohio]

most of the mortgage mess is because banks were trying to find people a way out of paying PMI. Now when the economy needs it most, pmi is nowhere to be found because banks found ways around the rules.

[maat55]

most of the mortgage mess is because banks were trying to find people a way out of paying PMI. Now when the economy needs it most, pmi is nowhere to be found because banks found ways around the rules.

Your right. I'm guessing that most of the forclosures are on notes that advoided pmi. PMI is so hated, that people will take risky loans to advoid it, I did at first, then refinanced shortly after.

[Exile]

PMI is there to cover the lender. If you default on the loan and the bank forecloses, they are still out of the money you owe them. The PMI pays the bank the money that you owed. Your paying their insurance basically.

Also when PMI goes away varies. From what I have read it usually is written off once the principle on the house reaches 20 to 25%. With my mortgage though FHA, the PMI will not go away until you hit that 20% AND you have had the mortgage for 5 years I believe. Thats a real bummer on my part. I will be talking to them about dropping it soon, but I am not counting on it.

I think another way that you can make PMI go away is at the point that the market value of your property exceeds the balance of your mortgage. In that scenario, the borrower has to be the one (natch) to initiate a request to the lender to cancel the PMI.

Another burden that I recall about PMI when DW and I were buying a home several years ago is that it was not tax deductible. I don't know whether or not that is still the case.

In our case, we were good credit risks when we took out the mortgage, but that was irrelevent in being required to pay PMI. We couldn't make a 20% down payment, and that's all that mattered. Moral of the story: If you can't pay at least that amount down, forget about homeownership. Otherwise expect to be screwed over.

[noppenbd]

I believe federal law requires the bank to drop PMI when the owner has 22% equity. The burden of proof is on the homeowner though, I think, and it is up to you to initiate the request to drop it. The bank has no reason to want to give up a little extra insurance that you are paying for.

[FrugalFish]

With my mortgage though FHA, the PMI will not go away until you hit that 20% AND you have had the mortgage for 5 years I believe. Thats a real bummer on my part. I will be talking to them about dropping it soon, but I am not counting on it.

Myrdale- I went through the FHA MIP drop process last year. FHA told me that even though all their information states that the loan holder must request it in writing, that in reality it is suppose to drop off automatically after 5 years and once 22% of the loan balance is paid (market value has no bearing here). When you get close to having 22% of your loan paid off, call FHA and check with them to see what balance they have on your loan.

Mine did not drop and I spent 11 months, many emails and letters, and hundreds of phone calls trying to straighten it out. In the end it turned out that neither of the 2 mortgage companies that had held the loan had ever properly reported the balances to FHA- they are suppose to do it once a month and our balance showed as if we had never prepaid a single penny. It's worth your while to make sure that the monthly reporting is being done correctly. You may have to call FHA repeatedly to get someone who will escalate your situation if the information is incorrect.

It was a royal pain. Thank goodness our MIP was low. We did get a refund on overpayment, but it was a major hassle. I wish I'd known to verify all the information a year or so in advance.