The uncertainty around private mortgage insurance has been one of the most aggravating problems we’ve had to deal with over the past few years (PMI). People on the internet are not contributing to the effort to clear up the uncertainty; rather, many of them are adding to it with false information.
The National Association of Realtors reports that the typical down payment on a mortgage is somewhere around 11 percent. This is the reality of the situation. That’s a significant number of prospective homeowners that are obligated to purchase PMI. As a result of this, we have made the decision to assist in dispelling the widespread myths regarding this reviled but essential program.
What is PMI?
Borrowers who put down less than 20 percent of the purchase price of a home are typically required to obtain private mortgage insurance in order to protect the lender in the event that the buyer fails to repay the loan.
There are some notable deviations from this rule, which we will discuss in further detail below.
In most cases, the annual premium for PMI ranges from 0.5 percent to 1 percent of the total loan amount. According to the United States Department of Veterans Affairs, the cost of private mortgage insurance (PMI) is $150 per month for a home that costs $250,000 when only 5% of the purchase price is put down.
Myth Number 1: “Government-backed loans don’t require PMI”
This one is true, but only to a certain extent. There is no need to obtain PMI with a VA loan. However, in order to obtain a loan, the majority of borrowers are required to pay something that is referred to as a “funding fee.” This fee is intended to lessen the impact on taxpayers in the event that the borrower is unable to repay the loan.
Mortgage insurance is something that FHA borrowers are required to acquire, however, their policy is referred to as MIP, which stands for Mortgage Insurance Premiums. There is a one-time activation fee in addition to the ongoing premium cost that must be paid.
The first one is usually the same for all borrowers, and it is 1.75 percent of the base loan amount. The second one, on the other hand, is determined by a number of different factors, such as the loan amount, the term, and the loan-to-value ratio. Because the premium amount is subject to vary on an annual basis, you should consult your lender in order to obtain information regarding the most recent MIP rates.
Myth Number 2: “You cancel PMI when you reach 20% loan-to-value”
This myth is partially true. If you have a conventional loan you can cancel the PMI premium when you reach the 20 percent equity level.
By law (Homeowners Protection Act of 1998), however, your lender must cancel the policy when you accumulate 22 percent of the home’s original purchase price in equity.
If, on the other hand, you have an FHA-backed loan, you can’t cancel the MIP unless you sell or refinance the loan.
Myth Number 3: “PMI is tax deductible”
This was true a year ago, but for 2018 tax returns, at least as of September 2018, this deduction is no longer available.
The ability to deduct PMI is one of those tax code provisions that expire every December 31st. Since its inception in 2007, Congress has renewed the deduction every year, sometimes at the last minute.
Hopefully, it will be again, but most tax specialists aren’t holding out hope. So, for now at least, “PMI is tax deductible” is a myth.
We aren’t mortgage professionals so we urge you to contact your lender or financial advisor if you have questions about private mortgage insurance.
