What is PMI?

PMI is Mortgage Insurance that is generally required on higher risk, higher leverage mortgages that protects the lender from a home owners inability to pay the mortage. I'm sure that didn't help, let's take a closer look.


A "standard" 80/20 mortgage means that the buyer is putting 20% down. So on a $300,000 house, the lender brings $240,000 in the form of a mortgage, and the buyer brings 60,000 in the form of a cash down payment. There is no PMI required on these loans, because if the buyer stops paying the mortgage, the bank is "likely" to recover ALL their money through foreclosure (the 240K), because even if they sell the hosue at a discount of 10%, or $270K - there's still plenty of money to pay the bank back. Worst case, the bank is taking only a small charge off.


In this case, the bank's risk of the buyer not paying is offset by the down payment. But not all loans require a 20% down payment, and as such, the lender/bank takes on more risk. To offset that risk, PMI exists.

PMI can add up - so figure out what levers

you need to pull when the time is right to stop that payment!


For an example, lets say that the buyer pays 5% down on the same house. Now he is only bringing 15,000, and the lender(s) are bringing 285,000. Now in this case, if the loan goes into foreclosure in the short-term, there is not enough money for the lender(s) to get paid back. Thus, they require the buyer to pay Mortgage Insurance, which will pay the bank back for any losses they sustain should the buyer fail to pay the mortgage. The buyer pays a fee - how much depends on how much they borrow, but usually around $150/month, and this protects the bank in case of default.



How do I stop paying for PMI?


Most people are pretty clear that PMI is a good thing, as it allows them to get a mortgage where otherwise they could not. And it is! But we all want to stop paying it as soon as possible. How do we do that? Well part of the solution is something that you were probably never told when you got the mortgage - how does the PMI company determine that you are at the 20% level? There are lots of ways they could do that - but don't look for them to spend a lot of money figuring it out.


Many PMI companies rely on the town's assessed value for figuring out what the house is worth. That can be a "real-time" problem, because assessed values in Massachusetts are at least 6-18 months behind the market, and worse, are not intended to be market value - they are usually comfortably below market, some times as much as 10%. That makes this number a guarantee you'll pay PMI longer than you have to, and unless the PMI company is willing to accept outside documentation - like an appraiser - It wont' be easy to prove you have your 20%.


For many people, re-financing is the most cost effective way to eliminate PMI ahead of schedule. Since the refinance will take into account a current market valuation - considerably higher than the assessed value - the 20% equity can be most quickly captured that way.


The good news is if you hit whatever metric they are measuring, they will stop chargin you on their own.


If you don't want to refinance, try to get a phone number for the PMI servicer, and find out how they calcuate your houses worth. That probably won't be easy, it's not like you get a bill from the PMI company directly. Once you have that information, you can make sure that the valuation they have is accurate, and that the PMI company is aware of the value of your house. If, for example, they are willing to accept an appraisal, you can hire an appraiser and then if the numbers support your case, send it on to the PMI company. Check first that they will accept it! Also ask if they will count any equity that you have built as part of your mortgage payments. Big surprise, the answer is often "NO" although I don't understand why they don't count it - equity is equity after all.


Do you have any other stop paying PMI suggestions? Let me know what has worked for you, and I'll expand the article.




Matt Heisler