by Peter G. Garvin, Vice President, Business Development, Zenith Home Loans

The mortgage industry is full of different terms and numerous different types of insurance. We have the following types of insurance that appear in a mortgage transaction:

Property insurance usually the home and contents; protects the consumer against loss.

FHA insurance protects the lender from loss in the event the borrower(s) default.

Private mortgage insurance protects the lender from loss in the event the borrower(s) default on conventional loans with less than 20 percent down.

This article will focus on the third type of Insurance listed above, private mortgage insurance (PMI).

When you get a conventional loan (not FHA or VA government backed loan) and you put down less than 20 percent, your lender will require you to purchase private mortgage insurance to protect the LENDER in the event that you default on the loan.

The lender charges an annual premium to help minimize the risk associated with a default by the borrower(s). This annual premium is broken into 12 monthly payments and becomes an additive to the PITI monthly payment that you make to your lender.

P: Principal
I: Interest
T: Taxes
I: Insurance (homeowners)

You may request a cancellation of your private mortgage insurance policy once you reach 20 percent equity in your home. This is determined by subtracting your outstanding loan amount from the market value of your property. Also, private mortgage insurance is automatically cancelled when your loan balance reaches 78 percent of the original value of your home. There are exceptions to these rules and these exceptions relate to the loan balance, type of loan (conforming or high balance), and past performance on monthly payments and credit of the borrower(s).

In the last issue of Colorado Medicine, we mentioned our newly designed “doctor loan” to assist young medical professionals with obtaining financing for purchasing a new home or to refinance an existing property. We highlighted the benefits of this program (5 percent down, loan amounts to $2,000,000, 720 FICO score, allows for exclusion of student debt and other options with NO PRIVATE MORTGAGE INSURANCE). Private mortgage insurance is not cheap, and it adds another component to your monthly payment. The cost for obtaining PMI can range from 0.5 percent to 5 percent. So, if we do the math and break this down to a monthly amount, let’s use the following example. Let’s say that you borrow $150,000 and the PMI percentage cost is 1 percent. That would be an annual amount of $1,500 or $125 per month added to your PITI payment. Wouldn’t it be great to not have to pay this amount every month?

Some of this may seem a bit confusing and you should always sit down with an experienced loan officer and ask any questions that you may have about private mortgage insurance or any other components of the mortgage loan process.

Feel free to call me directly at 303-907-7835 and I will be happy to answer your questions and personally introduce you to one of my professional senior loan officers on my team.

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