The Ultimate Guide to Private Mortgage Insurance

Since real estate investors utilizing conventional financing are often putting 20% or more down when purchasing rental properties, the discussion of private mortgage insurance isn’t typically associated with real estate investing. However, with the increased popularity of real estate investing strategies (make REFP page for that) like house hacking and Nomad, there is an increase in real estate investors that are opting to live in their properties that will ultimately becoming investments. Plus, there are down payment options for investors that require less than 20% down as well. These will also have PMI.

What is private mortgage insurance?

The best definition is right from the Consumer Financial Protection Bureau website:

Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.

I will emphasize a few key points of this definition.

Why should you consider getting private mortgage insurance?

Well, in most cases you are not going to voluntarily ask for private mortgage insurance. It will be required if you put less than 20% down payment down when you buy a property.

So, you could choose to put 20% down to avoid PMI.

In some cases, that may mean waiting until you save more money for 20% down.

But, it may make more sense for you to buy now and opt to accept a loan that would require PMI. Let me show you some math.

In cases where you have a limited amount to invest (like our examples on How to Invest $100K), buying properties with less than 20% down payment–where private mortgage insurance would likely be required–can be attractive.

Sample Private Mortgage Insurance Cancellation Letter

Use the following sample letter to edit and send to your loan servicer to request to have PMI removed from your loan.

January 22, 2020

Mortgage Co
1234 Main St
Fort Collins, CO 12345

Attention: Customer Service
RE: Account #1234-56789 for 123 Oak St, Fort Collins, CO 80525

Dear Sir or Madam;

I am writing to request the cancellation of the Private Mortgage Insurance (PMI) policy attached to my mortgage on 123 Oak St, Fort Collins CO 80525.

As you are aware, Federal law allows for the cancellation of PMI through a reduced loan-to-value (LTV) via either normal amortization of a mortgage, or amortization coupled with market appreciation.

The Homeowner’s Protection Act of 1998 calls for the automatic cancellation of PMI when a 78% LTV ratio has been reached through normal amortization. However, I also understand that I may request cancellation of my PMI when I have passed an 80% LTV threshold.

I believe that through my regular mortgage payments and favorable appreciating market conditions that I have passed the 80% LTV mark, and therefore should be able to cancel the PMI on my loan.

I further believe that my payment history meets your requirements as well.

Please advise me of the procedures for doing so at your earliest convenience. I look forward to your prompt reply.

Sincerely,

John Smith

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My Notes

Visitors can ignore these. They are notes to myself about what I should include on this page and in the presentation.

To be included in the presentation:

  • What is Private Mortgage Insurance (PMI)?
  • What affects your PMI rate?
  • Calculating PMI
  • Three strategies to pay PMI (upfront, increase interest rate, monthly)
  • FHA and permanent PMI
  • Analyzing a deal using The World’s Greatest Real Estate Deal Analysis Spreadsheet™ when you have PMI
  • The impact of PMI on buying a Nomad™ property (using REFP) – all 3 strategies analyzed – which is best
  • The impact of PMI on buying 10 Nomad™ properties (using REFP) – all 3 strategies analyzed – which is best
  • PMI in fast, normal and slow appreciating markets (should you not pre-pay)
  • How to remove PMI
  • PMI is an insurance policy on conventional loans
  • Shifts some of the risk from the lender to the insurance company for making a loan with less than 20% down payment… if the borrower can no longer make the payments and lender forecloses
  • When loan-to-value drops below 80%, PMI will no longer be necessary – some lenders will require you to get an appraisal to confirm the value of the property so a true loan-to-value can be calculated (make loan-to-value page on REFP)
  • Factors: loan-to-value, borrower’s credit score
  • For the monthly payment option of PMI: typical range of PMI is .3% and 1.5% of the initial loan amount annually. Investopedia claims .5 to 1% of the loan annually.
  • How to avoid PMI: put 20% or more down when buying a property, pay down your loan balance so that you are below 20% loan-to-value, opt to take a higher interest rate and have the lender pay PMI instead (raises rate for the life of the loan).
  • PMI is not insurance that protects you… it protects the lender.
  • Your heirs do not benefit from PMI… it does not pay off the house in the event of your untimely demise.
  • PMI is tax deductible, but there are limitations where it gets phased out for higher earners (research this more by looking up is PMI tax deductible)
  • Letter requesting removal of PMI and appraisal to have it removed
  • Homeowners Protection Act of 1998 – requires automatic termination of mortgage insurance in certain cases for homeowners when the loan-to-value reaches 78%.
  • Do lenders use PMI to approve higher risk borrowers (for example self-employed borrowers)?
  • Mortgage protection insurance… life insurance product (not to be confused with PMI).
  • MIP for FHA loans
  • Rate cards like https://www.mgic.com/rates/rate-cards and https://www.cu.mgic.com/rates/rate_cards.html (search for MGIC rates… credit unions versus other lenders)
  • 4 Plans: https://www.mgic.com/rates/mi-premium-plans
  • Create a calculator like this: https://www.hsh.com/calc-pmi.html
  • Sample PMI Cancellation Letter https://www.hsh.com/files/sample_PMI_cancellation_letter.pdf
  • Some sample providers: MGIC, Radian, Essent, National MI, United Guaranty and Genworth
  • Search for “Annual Mortgage Insurance Premium (MIP) from US Department of Housing and Urban Development for rate sheet
  • When can I remove private mortgage insurance (PMI) from my loan? https://www.consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202/
  • Is PMI tax deductible?
  • Piggybacking – second mortgages
  • And much more…

James make sure you cover:

  • What Private Mortgage Insurance Is and How to Avoid It
  • 6 Reasons to Avoid Private Mortgage Insurance
  • 5 Types of Private Mortgage Insurance
  • PMI: How Private Mortgage Insurance Works
  • What is Private Mortgage Insurance (PMI)?
  • PMI: A Guide to Private Mortgage Insurance
  • How much does private mortgage insurance cost?
  • Is private mortgage insurance worth it?
  • How can I avoid PMI without 20% down?
  • How do I get rid of PMI on my mortgage?
  • You Don’t Have To Pay Private Mortgage Insurance or PMI
  • What is Private Mortgage Insurance and How Does PMI Work?
  • PMI-4 Things You Should Know About Private Mortgage Insurance
  • YouTube videos – snippets of my presentation or even top questions about PMI answered
  • When is mortgage insurance typically required?
  • What is PMI insurance?
  • How is PMI calculated?
  • PMI rates
  • When is mortgage insurnace required?
  • How to avoid PMI
  • When do you need mortgage insurance?
  • Private mortgage insurance percentage
  • What is PMI based on?
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