Tuesday, May 30, 2023

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

Private mortgage insurance (PMI) has long been touted as a benefit that allows borrowers to purchase a property with as little as 20% down. But who is the real beneficiary of PMI? We are told that PMI insurance is what the lender pays if we default on our mortgage. While true, it doesn’t tell the whole story. You need to know a lot more.

It must disclose to the lender:

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

  • At closing and annually thereafter, the lender must notify the borrower of the cancellation options available to him. In most cases, the PMI can be canceled when the mortgage is reduced to 80% of the sale price or original appraised value. This will typically be automatically canceled when the amortization of the loan reduces the mortgage balance 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 is not required to disclose the name of the insurer or the amount of insurance purchased. Yet the buyer is usually responsible for the premium.

  • Lenders can buy security for 40% or more of the mortgage amount without telling the buyer over and above the premium amount. For example, you buy a $200,000 home with a 10% down payment of $20,000, financing the balance with a $180,000 mortgage. The lender can protect 40%, or a total of $72,000, with mortgage insurance as you pay the premium.

  • The proceeds received by the lender from the PMI policy do not offset any deficiency judgments against you, the borrower. They can collect on the policy and still come after you.

  • PMI can be paid to anyone with insurer transaction line For services rendered that either reduce the risk of credit or reduce the expenses of the insurance company. This means that they can pay a commission to the lender. Understand that it comes out of your pocket.

  • The monthly premium for most PMIs is fixed. In other words, as the mortgage balance declines, the borrower continues to pay the same premium based on the risk assessment at the time the loan originated, possibly with a risk to the lender.

  • While many lenders will consider allowing the buyer to cancel the PMI if the value of the property increases in order to achieve an 80% loan to value ratio, they are not obliged to do so, In my experience, the lender requires that I pay to have the appraisal done by the appraisal company they choose. In addition, the borrower usually must provide proof that there is no second mortgage on the property.

  • Lender can buy PMI, for which they pay a premium, without notifying the borrower, The money for these premiums may come indirectly from the borrower through points paid at closing or from higher interest rates.

PMI premiums are not insignificant. I saw a loan statement for one of my recent investment properties. On a loan of approximately $200,000, the monthly principal and interest payment was $1,124.93. The monthly PMI was $163.53, or 15% of the P&I. Yet I do not know how much insurance was purchased or from whom. If I had owned this property for the 10 or so years needed to reduce the mortgage balance to 78% of the purchase price, I would have paid over $19,000 in PMI premiums (about 10% of the original loan amount).

In several recent articles on foreclosure, borrowers are urged to contact their lenders immediately when they are in financial trouble or feel they will be unable to keep up with their mortgage payments. They emphasize that settling with your lender is much better than going through foreclosure. Even if foreclosure is unavoidable, industry sages recommend working with the lender to facilitate a “short sale,” where the sale price is less than the mortgage amount, thus avoiding the stigma of foreclosure. goes.

get up!!If the lender is covered by the 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 to foreclose to pick up your insurance? Isn’t it ironic? You could be paying thousands for coverage that helps pit your lender against your best interests. ,A banker is someone who lends you an umbrella, but who wants it back when it rains,” my father said.

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