Private Mortgage Insurance (PMI) – the Mortgage Industry’s Dirty Little Secret

Private Mortgage Insurance (PMI) has long been promoted as a feature that allows borrowers to purchase a property for as little as 20%. But who is the real beneficiary of PMI? We are told that PMI Insurance pays the lender if we default on the mortgage. While it is true, it does not tell the whole story. There is a lot you should know.

This is all the lender must disclose:

  • As part of a “good faith” estimate of closing costs, the lender must provide an estimate for the PMI premiums.

  • At closing and annually thereafter, the lender must notify the borrower of available cancellation options. In most cases, the PMI may be canceled when the mortgage is paid up to 80% of the sale price or the original appraised value whichever is less. They are usually automatically canceled when amortizing the loan brings the mortgage balance down to 78%.

What you don’t know and they don’t tell you: 

  • The borrower is not a party to the mortgage insurance policy. The lender does not have to disclose the name of the insurance company or the amount of insurance purchased. However, the buyer is usually responsible for the installments.

  • Lenders can purchase protection of up to 40% or more of the mortgage amount without disclosing it to the buyer Any more than the amount of the insurance premium. For example, you could buy a $200,000 home with a 10% down payment of $20,000, and finance the balance with a $180,000 mortgage. The lender may protect 40%, or a total of $72,000, with mortgage insurance with a premium paid.

  • The proceeds that the lender receives from a PMI policy do not offset any judgment against you, as the borrower. They can collect politics and still come after you.

  • The PMI insurance company can pay anyone along the line of the transaction For services rendered that reduce the risk of the loan or reduce the expenses of the insurance company. This means that they can pay commissions to the lender. Understand that it is coming out of your pocket.

  • The monthly installment for most PMI is fixed. In other words, as the mortgage balance decreases, likely along with the risk to the lender, the borrower continues to pay the same premium based on the risk assessment at the time the loan was originated.

  • While many lenders will consider allowing the buyer to cancel the PMI when the value of the property has risen so that the 80% loan-to-value ratio is achieved, They are under no obligation to do so. In my experience, the lender required that I pay for the appraisal done by an appraisal firm chosen by them. Also, the borrower must usually provide proof that there is no second mortgage on the property.

  • The lender can purchase a PMI, which they pay in installments without notifying the borrower. The money for these installments may come indirectly from the borrower through points paid at closing or from higher interest rates.

PMI premiums are not insignificant. I looked at a loan statement for one of the investment properties I owned recently. On a loan of about $200,000, the monthly principal and interest payment was $1,124.93. The monthly PMI was $163.53, or 15% of the P&I. However, I never knew how much insurance was purchased or from whom. If you had held this property for 10 years or more to reduce the mortgage balance to 78% of the purchase price, I would have paid over $19,000 in PMI installments (nearly 10% of the original loan amount).

In many recent articles on foreclosures, borrowers are urged to contact their lenders immediately when they encounter financial problems or feel they will not be able to maintain existing mortgage payments. They stress that coming to an arrangement with your lender is much better than going through foreclosure. Even if a foreclosure is unavoidable, industry sages recommend working with the lender to facilitate a “short sale,” in which the sale price is less than the amount of the mortgage, thus avoiding the stigma of foreclosure.

I wake up!!If the lender is protected by a PMI policy, will they be more or less willing to work with you? Why would they offer you extended or more favorable terms or allow a short sale when they only need the foreclosure to collect their insurance? Isn’t it ironic? You can pay thousands for coverage that helps your lender stand up to your best interests.A banker is someone who will lend you an umbrella, but wants it back when it rainssaid my father.

Source by Toby Tobin

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