What is PMI?
Before we answer the question, can a person shop around for cheaper PMI insurance, what is PMI insurance?
PMI is personal mortgage insurance. This insurance policy is paid in full by borrowers who are financing a new home purchase or a refinance. Borrowers who are financing more than 80% of the value of the home are required by lenders to obtain and pay for this insurance automatically. The insurance is added on to your monthly mortgage payment and billed to you directly from the lender.
Personal mortgage insurance helps the lender in the event that you are unable to make your monthly mortgage payments and you default on your loan. Statistics have shown that those who put less down on a home purchase are more likely to default. PMI offers lenders protection against this possibility.
How Does PMI Work?
PMI is based on the amount of the value of a home less the down payment. Here is an example of what PMI does to protect a lender:
- You are able to put a 10% down payment toward the purchase of a home.
- The lender knows that you are more likely to default and is only comfortable financing 80%.
- The lender obtains a PMI policy from the insurer of his choice and finances your loan.
- At closing, you pay a PMI fee (or you may also pay an ongoing monthly premium).
- In the event that you default, the lender would receive the 10% additional that you did not put down from the insurer.
The advantage to homeowners is that PMI allows them to purchase a home with a substantially lower down payment. The disadvantage is that PMI can add a significant amount on to the monthly mortgage payment. In spite of the high cost involved in PMI, you cannot shop around for a lower rate.
The cost of PMI varies greatly depending on your credit rating, the amount of your loan, and the type of loan you are acquiring (fixed or adjustable). Rates are nearly identical across the eight companies that offer this insurance to lenders.
The Homeowner’s Protection Act of 1995 (HPA) made allowances for cancellation of personal mortgage insurance. They fall into two separate categories:
Loans obtained prior to July 29, 1999:
Annual statements must be sent to you as the person paying the mortgage advising you of the right to cancel PMI under certain circumstances. This statement must include the name, address and contact information for the company who holds the policy.
Loans obtained after July 29, 1999:
At loan closing:
- The borrower must be told of their right and the date that they can cancel PMI.
- The borrower must be informed that under law the insurance will automatically terminate.
- If the loan is a fixed rate, the borrower must be provided an amortization schedule.
On an annual basis:
- Advise the borrower of the right to cancel PMI.
- Provide an address to contact the loan servicer.
If coverage is canceled:
- The borrower must be notified in writing that the coverage no longer exists.
- The borrower must be notified that PMI premiums are paid in full.
The responsibility for cancellation remains with the lender at all times.
To answer the question, can a person shop around for cheaper PMI insurance, the answer is clearly no. Since PMI cannot be negotiated; however, consumers are offered wide protection in how long they must maintain it. PMI can add a significant amount to your monthly mortgage payment. Be sure that you ask your lender how much the insurance will cost. It may be worth your while to put a larger amount down and avoid this costly insurance.
This post is part of the series: Home Ownership Challenges
There are many considerations that one must make in order to purchase a home. These articles cover title insurance, personal mortgage insurance and investment property information that can help you decide what is right for you.