Common Sen$e: What the Heck is PMI?

Art Wood

“What is PMI?” and “How do I get rid of it?” are two of the most asked questions I get when people are applying for a mortgage (just behind “What is my rate?”). Let me start by defining PMI. It stands for Private Mortgage Insurance. It is required on most loans where you do not have at least 20% equity. It serves to protect the lender’s interest in the property should a borrower lose the house to foreclosure. You can pay it in one of three ways: • You can pay it monthly in your mortgage payment. • You can roll it into your rate. (Think higher interest rate.) • You can pay it in one lump sum at closing.

In each of the options, the PMI amount is determined by third-party PMI companies that utilize your credit score, debt to income, and loan to value to generate your payment. The more qualified you are, the cheaper your PMI will be.

I often think that PMI gets a bad rap. For well-qualified borrowers, PMI can be cheap. Let’s look at a real-life situation. I have a client who is buying a $600,000 house and only putting 10% down. She is well-qualified, and the PMI is only $88 per month. Her choice was to either pay the $88 per month or put another $60,000 down to avoid the PMI. In some instances, a client may not have enough to cover the full 20% down, but in this situation, she would rather keep her $60,000 and pay $88 in PMI per month.

So how do you remove PMI? There are three ways to remove PMI. The first way would be for it to fall off automatically when you reach 78% loan to value. If you do nothing other than pay your mortgage payment for the specified number of years, your PMI will fall off automatically once you get to 22% equity.

The second way to get rid of PMI would be to request removal manually from your mortgage servicer. You could do this when you feel like you have 20% equity either from paying down the loan more aggressively, or, as in the current market, your home value has gone up faster than anticipated. Your mortgage servicer would order an appraisal at your cost, and if it comes back with 20% equity, they will remove it. There are some other stipulations that most companies have where you have paid PMI for at least two years and paid on time for the last twelve months.

Finally, you can remove your PMI by refinancing. This only makes sense if there are additional benefits like lower rates. If you feel like you have 20% equity already and a super low rate, then you may as well call your mortgage servicer and request an appraisal like I suggested above. Rates are at historic lows now, so I have a lot of people doing refinances to reduce their rate at the same time they are getting rid of their PMI.

This is just the tip of the iceberg. There are a lot of other variables to consider, the main one being FHA loans. That’s an entirely different story, mainly in that the FHA version of PMI is called MIP. ALL FHA loans will have MIP regardless of equity, and in most cases, the only way to remove it is with a refinance. If you have questions about PMI, I suggest a conversation with your favorite local mortgage guy so he can point you in the right direction. Art Wood (NMLS #118234) is the branch manager of the Art Wood Mortgage Team of Goldwater Bank, located at 2341 Main Street in downtown Tucker. “Tucker’s Mortgage Guy” for fifteen years, he is a former Tucker Tiger (Class of ’92), and co-founder and organizer of Taste of Tucker. Family guy, community guy, and definitely not your typical mortgage guy - it’s all that he does that makes Art Wood who he is. Contact him at 678.534.5834 or art.wood@goldwaterbank.com.