What is Private Mortgage Insurance (PMI)?



Private mortgage insurance, or PMI, is a type of guarantee that helps protect lenders against the costs of foreclosure.  It is typically required when a borrower buys a home with a down payment of less than 20 percent.  If a borrower is refinancing a Georgia home mortgage, PMI is required when the equity in the home is less than 20 percent.

This insurance protection is provided by private mortgage insurance companies.  Although it's designed to protect the lender, the borrower is the party responsible for paying for private mortgage insurance.  However, there's a benefit to the borrower as well-- private mortgage insurance enables lenders to offer home loans with lower down payments.  Without it, the borrower would have to make a down payment of at least 20% in order to purchase a new Georgia home!

The cost of PMI increases as the down payment decreases.  For example, if a borrower puts down 10% of the purchase price of a new Georgia home, the private mortgage insurance premium will be less than if the borrower put down only 5%.  Private mortgage insurance is usually added to the monthly home mortgage payment.

Canceling private mortgage insurance:

Federal law requires PMI to be cancelled under certain circumstances.  In addition, Fannie Mae guidelines provide for cancellation of PMI in additional situations, if the loan is owned by Fannie Mae.

In general, private mortgage insurance for a loan originated on or after July 29, 1999---which is secured by the borrower's one-family principal residence or second home---will be cancelled when the loan-to-value ratio (LTV) reaches 80 percent based on the value of the home at loan origination.   In order to cancel PMI under the rules of July 29, 1999, the borrower must have a good payment history and the property value must not have declined. Cancellation of private mortgage insurance does not normally happen automatically, however-- it must be requested by the borrower.

Private mortgage insurance on home mortgages owned by Fannie Mae can also be cancelled at the homeowner's request when the loan to value (LTV) reaches 75 percent based on the current value of the home as established by a new appraisal.  However, the borrower must have a good payment history, and the loan must be at least two years old.

If the borrower does not request PMI cancellation, the PMI servicer must automatically cancel PMI on these loans when the LTV is scheduled to reach 78 percent, based on the value of the home at loan origination.  However, the loan must be current at that time.  For loans originated before July 29, 1999--that are secured by the borrower's principal residence or second home and are owned by Fannie Mae--- PMI will generally be cancelled at the midpoint of the loan term, provided that payments are current at that time.

Georgia Residential Mortgage Licensee #7359

National Mortgage Licensing System & Registry (NMLS) # 133589