Private Mortgage Insurance

Mortgage insurance covers the mortgage lender against loss caused by a mortgagor’s default. This insurance may cover part or all of the loss, and it may or may not relieve any liability on the borrower’s part if there is a default on the mortgage.

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Private Mortgage Insurance, or PMI, was developed to help qualified borrowers purchase a home with down payments less than 20% of a purchase price. Borrowers use PMI to get into a home years earlier than they would otherwise. PMI has helped make home ownership possible for millions of families.

Different loan types refer to PMI in different ways and some loans have different requirements for the amount of coverage needed. The following are some examples.

Conventional Mortgages: PMI is usually required when a borrower is putting less than 20% down on an owner-occupied residence. The premium may be paid annually, monthly, or on a single premium plan. Premiums are based on the terms and amount of the loan and may vary according to the amount of coverage required by the lender, the loan-to-value, type of loan and the term of the loan. The less the borrower puts down, the higher the premium. PMI may be waived when the loan reaches 80% or less of the value of the property.

FHA Mortgages: FHA requires an upfront, one-time fee of 2.25% the loan amount regardless the amount of the down payment. There is also a yearly fee of 0.5% of the unpaid balance of the loan that is divided into twelve equal payments and paid monthly with the house payment. If a loan is paid in full during the first seven years, there may be a prorated refund of the upfront premium paid. The monthly mortgage insurance premium is paid regardless the loan-to-value ratio.

VA Mortgages: VA loans are guaranteed by the Veterans Administration. At closing, the lender is required to collect a one time funding fee. This fee is between 0.5% and 3% of the loan amount depending upon the status of a veteran and if the veteran has previously used VA benefits for a home purchase. There is no monthly premium nor is there a refund on the funding fee if the loan is paid off early or when the loan-to-value is below 80%.

PMI Termination: When your mortgage balance reaches 78% of your home’s original value, PMI can be canceled if you are current on your mortgage payments, have no liens on your property, and your loan is not considered high-risk. You may also end PMI by having an appraisal done and proving your loan now represents 80% or less the value of your home. Paying PMI for even one month longer than necessary is throwing away your money. Know what your principal balance has to be in order to cancel your PMI, and request that it be cancelled when your equity reaches 20% of the original value of your home. Don't wait for your lender to notify you that your PMI can be cancelled.

If you do not know if you are paying PMI, call your lender. If they inform you that you are paying PMI, ask for the details on when and how it can be cancelled. Having an amortization schedule of your loan, which shows how much of each monthly payment goes to interest, how much is principal and what the balance is after each payment, will help you identify when you no longer need PMI. To create your own amortization schedule or for other loan and mortgage calculations, use our free financial calculators by clicking on the links to the left under Mortgage.

Insurance Glossary

PMI - Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

PMM - Purchase money mortgage. A mortgage given by the seller simultaneously with the purchase of real estate to secure the unpaid balance of the purchase price.

Pro-Rate - To allocate between seller and buyer their proportionate share of an obligation paid or due.

Promisory Note - A promise to pay. The promisory note document gives the mortgage company "in personam" jurisdiction over the mortgagor.

Real Property - Land and that which is affixed to it.

Reissue Rate - A reduced rate of title insurance premium applicable in cases where the owner of the land has been previously insured in an owner's policy by the insurer within a certain time.

Second Mortgage - A mortgage, the lien of which is subordinate to that of another mortgage.

Mortgage Note - An instrument used to encumber land as security for a debt. This document gives the mortgage company "in rem" jurisdiction over the mortgagor.

Mortgagee - A designation for the mortgage lender on lands.

Mortgagor - A designation for the mortgage borrower on lands.

MIP - Mortgage insurance protection

Abstract of Title - A condensed history or summary of all transactions affecting a particular tract of land.

Adjustable Rate Mortgages - Mortgages with an interest rate that may change up or down depending on an indicator. These are usually based something like the current Treasury bill rate.

Affidavit - A sworn statement in writing.

All-Inclusive Title insurance - This means that most title insurance charges are included in one price.

Amortize - To reduce a debt by means of regular periodic payments which include amounts applicable to both principal and interest.

APR - Annual Percentage Rate. On some mortgages the APR is higher than your actual mortgage rate.

Assumption - A mortgage that allows a new owner to take over payments. The original borrower remains liable on the mortgage note.

Deed - A written document by which the ownership of land is transfered from one person to another.

Deed of Trust - Instrument used to secure a loan on real estate. Like a mortgage, generally used in the South. The major difference is in how forclosures are handled. Forclosures are much faster with a Deed of Trust than with a Mortgage.

Deposit or Earnest Money - Advance payment of part of the purchase price to bind a contract for property.

Due-on-Sale Clause - A provision in a mortgage or deed of trust which requires the loan to be paid in full if a property is sold or transfered.

Equity - The interest or value which an owner has in real estate over and above the debts against it.

Escrow - (1) A procedure whereby a disinterested third party handles legal documents and funds on behalf of a seller and buyer. (2) Money that is kept by the mortgage company to ensure that taxes can be paid in full when due. This is paid up front on settlement sheet lines 1001 - 1006 and is added to the mortgage payment monthly over the prinicial and interest figure.

FNMA (Fannie-Mae) - The Federal National Mortgage Association, a federally sponsored private corporation which provides a secondary market for housing mortgages.

Fixed Rate Mortgages - Mortgages with a fixed interest rate. Your payment for principal and interest will not change for the life of the loan. Your monthly payment may change if taxes or insurance rates change.

FHA - The Federal Housing Administration. An agency of the federal government which insures private loans for financing of new and existing housing and for home repairs under government approved programs.

FHLMC (Freddie Mac) - Federal Home Loan Mortgage Corporation. An affiliate of the Federal Home Loan Bank, which creates a secondary market in conventional residential loans and FHA and VA loans by purchasing mortgages from members of the Federal Reserve System and the Federal Home Loan Bank System.

Foreclosure - Legal process by which a mortgagor of real property is deprived of his interest in that property due to failure to comply with terms and conditions of the mortgage.

Grantee - A person who acquires an interest in land by deed, grant, or other written instrument.

Grantor - A person who, by a written instrument, transfers to another interest in land.

Hazard insurance - The homeowner's insurance policy.

Heir - One who might inherit or succeed to an interest in lands under the rules of law applicable where an individual dies without leaving a will.

In personam - Directed at specific persons rather than against property or generally for all people.

In rem - Pertaining to property or people in general.

Interest only payments - A mortgage where only the interest is paid on a monthly basis. This means that the buyer gets no equity. This is only used on some purchase money mortgages where the buyer is responsible for paying the seller the entire amount of the second mortgage at some time in the future.

Instrument - A written document.

Loan origination fees - Money required by the lender to be paid to start the work of approving a mortgage.

Judgment - A decree of a court.

Lien - A hold, a claim or charge allowed a creditor upon the lands of a debtor.

Note - A written promise to pay a certain amount of money, at a certain time, or in a certain number of installments. It usually provides for payment of interest and its payment is at times secured by a mortgage.

  • The mortgage note document gives the mortgage company "in rem" jurisdiction over the mortgagor.
  • The promisory note document gives the mortgage company "in personam" jurisdiction over the mortgagor.

P.O.C. - Paid outside of closing. Sometimes the lender requests this money before settlement. If you pay any charges before settlement they should be written on the settlement sheet. They are written on the proper line outside of your column. They should also be marked P.O.C.

Point - A percentage point - equal to one percent of the loan amount.

Power of Attorney - An instrument authorizing another to act on one's behalf as his agent or attorney.

Survey - The process of measuring land to determine its size, location and physical description and the resulting drawing or map.

Tax Service Fee - A fee paid to the mortgage company to verify that they actually pay the real estate taxes.

Title - The evidence or right a person has to the ownership and possession of land.

Title Insurance - Insurance against loss or damage resulting in defects or failure of title to a particular parcel of real property.

Title Insurance Binder or Commitment - A report issued by a title insurance company binding or committing the title insurance company to issue the form of policy designated in the commitment or binder upon compliance with and satisfaction of requirements set forth in the commitment or binder.

Title Search - An examination of public records and court decisions to disclose the current facts regarding ownership of real estate.

Transfer taxes - Money paid to the county and or state when property is sold.

Will - A written document properly witnessed, providing for the distribution of property owned by the deceased

VA - The Veterans Administration. They insure mortgages.

 

 

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