Realty Times February 5, 1999

PMI Gets Wise to Consumers
by Broderick Perkins

Often Maligned Private Mortgage Insurance Helps Opens Door To Home Ownership

Shaking off a bad rap after years of errant lenders failing to cancel private mortgage insurance (PMI) when the coverage was no longer necessary, the PMI industry is becoming more consumer friendly by extolling the virtues of the often misunderstood coverage.

Private mortgage insurance is required on most low-down payment mortgages and without it two of the five home buyers who use it may not otherwise be able to buy a home, according to the Mortgage Insurance Companies of America, the industry's trade group.

"The benefit is that if they want to put less than 20 percent down or they just don't have 20 percent down, they are not shut out of the housing market," said Glen Corso, spokesman for PMI Mortgage Insurance Co. in San Francisco, one of eight companies that comprise the industry.

Offering a new Web site for consumers called privatemi.com the industry also says alternative low-down payment mortgage financing methods generally cost more and remain a financial burden longer than private mortgage insurance.

What is PMI?

Required on most loans with down payments of less than 20 percent, PMI protects lenders from borrowers defaulting on the mortgage. Mortgage industry studies reveal that borrowers making smaller down payments are more likely to default than those with larger down payments.

The insurance, however, carries no protection for borrowers who must pay the premiums which are not tax deductible. (Fannie Mae did recently announce it's reducing the cost of PMI required on the loans it buys.)

Federal law mandates that when a lender writes a mortgage it must disclose PMI details, including how and when borrowers can cancel PMI. Years down the road, however, when PMI coverage is no longer necessary, irresponsible lenders haven't always come forward to remind borrowers it could be time to cancel. That has led to many home owners paying hundreds, even thousands of dollars in premiums that were no longer necessary.

In recent years, consumer groups have led a charge of class action suits, new state laws and finally the federal Homeowners Protection Act of 1997, all to provide more consumer protection against PMI abuse. Amending the Truth in Lending Act, the federal law is effective July 29 this year and it forces lenders to automatically cancel mortgage insurance when a homeowner pays down the mortgage to 78 percent of the original purchase price, among other provisions.

The new law does not apply to Federal Housing Administration (FHA) loans, high risk loans and some other mortgages. Check with you lender or broker before you sign on the dotted line to determine if your loan qualifies for PMI cancellation when certain milestones are met.

PMI's benefits

MICA's new Web site tells consumers exactly when and how to get rid of PMI and it details PMI's benefits while you are paying the premiums.

Among the benefits:

  • You can avoid the extra costs often associated with a second mortgage many home buyers obtain to help them attain a 20 percent down payment. Called a "piggyback" or "80/10/10" loan (80 percent first mortgage, 10 percent second, 10 percent down), the mortgage stacks a high-rate small second mortgage on top of a lower-rate first mortgage. The loan allows you to buy a home with less than a 20 percent down payment and no PMI, but your monthly mortgage costs could be higher, some piggybacks come with a balloon payment in 15 years and you are stuck with the loan until you pay it off. PMI can be canceled.

    "The PMI industry responded to the competition and came up with products that would allow the borrower a monthly payment on mortgage insurance for less," said Corso.

    MICA'S privatemi.com Web site gives you a calculator to make your own rough comparison between a mortgage with PMI vs. one with a piggyback loan, but it doesn't include every financial consideration, including state tax savings provided by a home mortgage.

  • You can buy a home with as little as 3 percent down. That means you can buy a home sooner than you could otherwise and the sooner you buy the sooner you can start building equity and taking advantage of the home as a tax shelter.

  • You can buy more house. With $15,000 down, the most home you can buy and avoid PMI is a $75,000 home. If you use the $15,000 to put 10 percent down with an insured loan, you can buy a $150,000 home. Likewise with 5 percent down you can buy a $300,000 home. This all assumes you've got the income to handle the mortgage payment in each case.

  • You can hold onto some of your down payment cash for other uses including paying off higher-cost consumer loans, or investing for larger gains.

    MICA also says consumers can choose from PMI premium plan choices: a monthly premium paid when you pay your mortgage each month; a single premium financed as part of your loan and lender-paid PMI, in which case you'll pay a higher interest rate on the mortgage.

    Be sure in all cases to get a full disclosure about how PMI can be canceled and how any financed premiums will be handled. Even if the lender provides a prorated refund of a financed premium, what happens to the ongoing mortgage which still carries monthly payments, a higher interest rate or both reflecting the financed premium?


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