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 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 Private Mortgage Insurance (PMI).

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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.

First, PMI is insurance.

Second, it protects the lender (not you)

If you get a loan with less than 20% down, the lender may require that you purchase an insurance policy (usually from a third party… the Private Mortgage Insurance company) that will pay out to the lender if you default on the loan and the lender doesn't get their money back (up to certain limits).

This insurance (and your other qualifications like credit score and income) helps gives the lender the confidence to loan you money you need to buy the house without putting 20% (or more) down.

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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