No. What you sign at closing is what you’ll pay for private mortgage insurance for the duration of the loan (until you read 80% loan to value).
Can it increase before closing? Yes, but the underwriting is obligated by law to send you an “adverse action” notice instructing you that information your credit report will be used to raise your premium.
I was looking around on the PMI Group’s website when I discovered, smack on their front page, an endorsement of private mortgage insurance by none other than “internationally acclaimed personal financial expert” Suze Orman. This is the same Suze Orman who endorsed the leases of General Motors when they came knocking with their suitcase of money. This is also the same Suze Orman who says, in her book The Money Book for the Young, Fabulous & Broke, that the young should use their credit cards to buy things, before they get jobs, so they can get started in the world. So… Suze Orman has already lost credibility in my book but I’ll give this little pitch a listen.
On her show, a caller calls in about a debate she has with her husband. Her husband wants a first and second mortgage, the caller wants just one mortgage and PMI. Her husband works in the mortgage industry… so what does Suze recommend? Obviously the one big mortgage with PMI, very industry friendly. A few things to note: She automatically assumes that the second loan is a home equity line of credit, to which the caller agrees but I doubt she really knows, and she starts insulting the caller’s husband as not having a brain!
When your Loan To Value (LTV) ratio falls under 80%, you are no longer obligated to pay private mortgage insurance. The Homeowner’s Protection Act of 1998 (made effective in 1999) made the process automatic whenever you reach 22% equity based on the original assessed property value (you can request it at 20%), but what about if you think the LTV ratio has fallen because the value of the home has appreciated?
Well, that’s what you have to initiate a dialogue with your lender and figure out how you can get PMI removed. Here is a short anecdote by Scott who has initiated a conversation with CitiMortgage about getting his PMI charges removed from his mortgage.
So you’ve gone the route of a piggyback mortgage to avoid PMI, but you see that the interest rate on your piggyback (2nd) mortgage is higher than your first, what gives? Well, while you’ve avoided paying PMI, your lender still has to get it themselves because they need protection against you defaulting on your loan - that’s why the 2nd mortgage interest rate is higher.
So why is a piggyback better than just asking your lender to increase the rate on your first mortgage? It’s better because your second mortgage is smaller so if you were to prepay, you can close out this loan faster than the larger first mortgage.
One other “gotcha” you should look out for is whether your 2nd mortgage is variable or fixed rate. My 2nd was a fixed rate at 7.5% (for comparison, my first mortgage was 5.75%) but many folks have a variable (i.e., adjustable) rate on their second mortgage which is dangerous is our rising rate environment. Just something ot keep an eye out for.
Right now your private mortgage insurance premiums are not tax deductible and a lot of prospective homeowners are turning away from PMI and turning towards piggyback mortgages (taking an 80% first, and as much as a 20% second mortgage). To combat this, the PMI industry last year unsuccessfully sought to make PMI premiums tax deductible and this year it’s trying again.
In January, Senator Gordon Smith, a Republican from Oregon, introduced a bill that would make PMI premiums tax deductible and industry experts predict about 12 million homeowners would save about $200 on their taxes, or $2.4 billion in total.
OTB.
Since the lender typically selects the private mortgage insurance underwriter, you typically won’t know who it is. If you’re currently paying PMI, the easiest way to find out who your PMI underwriter is is to look at your mortgage statement. It should tell you where your payments are going, how they’re split up, and list out those companies.
Look for one of the following names:
The list above represents the major private mortage insurance underwriters in the United States but there might be a possibility your underwriter isn’t on the list. If that’s the case, a simple Google search will likely reveal who the underwriter is.
MGIC, one of the largest private mortgage insurance underwriters, has a program called SingleFile where the lender the homeowner is working with charges them more interest, about a quarter to half a percent, and the lender pays MGIC directly. The homeowner can thus deduct the cost of PMI and avoid the only major downside of a piggyback mortgage, the additional closing costs. Unfortunately, on the lowest credit risk borrowers can apply for this program and in this particular case PMI can’t be cancelled unless the mortgage is refinanced.
Is this a good program? Depending on how long you plan on being in your home, this plan could be good or bad. If you’re especially short term, like five years or less, I think this is a good plan for you. With only one loan, you pay closing costs on only one loan. With no PMI (since it’s rolled in), the costs of the “PMI” is in interest which is tax deductible.
If you’re in it for the long haul, SingleFile is probably not a good product for you, here’s why:
1. While you only pay closing costs on one loan, the PMI can’t be cancelled so in order for you to get it removed you’ll have to refinance. Refinancing has closing costs as well, pay the piper now or pay him later… either way you will still pay closing costs twice. Current interest rates are so low that if you refinance it won’t be to a lower interest rate… double whammy.
2. PMI is automatically cancelled when your loan to value falls under 78%, you can request it be removed once it falls under 80%. Chances are your loan to value will fall under 80% if you plan on living in the home for a while so constantly paying PMI, even if it’s hidden in a higher interest rate, isn’t in your best interests.
If you only want one loan and see yourself living in the house for longer than, say, five to ten years - get PMI (or piggyback) but don’t get this plan. (my vote still goes to piggyback mortgages).
FHA, which stands for Federal Housing Administration (HUD Office of Housing), has a mortgage insurance program that helps moderate to low income families get the financing they need to buy a home. Moderate to low income families are then able to get a mortgage loan from a HUD approved lender with the insurance FHA provides.
If you’re not familiar with PMI, here’s a brief introduction, then you’ll wonder the difference is. First off, the rules regarding automatic cancellation of the insurance provided by The Homeowner’s Protection Act of 1998 do not apply. Secondly, there are the obvious income requirements since FHA insurance is designed for moderate to low income individuals and families. Lastly, there are restrictions as to what kind of mortgage you can get, essentially investors need not apply.
Did you receive a letter from a private mortgage insurance company about an “adverse action?” Don’t worry, it’s typical and you’re not in trouble.
The Fair Credit Reporting Act (FCRA) requires that whenever an insurance or credit issuer pulls your credit report and uses it to set an insurance rate or terms of credit they are required to file an “adverse action notice” and send it to you. If you just applied for a mortgage loan that had a loan to value ratio greater than 80% (i.e. you need PMI), then your lender likely applied to a PMI underwriter for mortgage guaranty insurance (MI) on your behalf. The underwriter then pulled your credit report, decided on a rate, and then mailed you the “adverse action notice.”
The Homeowner’s Protection Act of 1998 went into effect on July 29th, 1999 and applies to single-family homes, investment properties, and multifamily homes; and essentially says that if the loan to value ratio falls to 80%, a borrower in good standing can request from the lender that the requirement of having private mortgage insurance be nullified. If it falls to 78%, it must be done so automatically. If you’re not in good standing then the LTV ratio must fall to 50% if the borrower is current in payments.
Also, this must all be done at no cost to the borrower.
There are other parts of the Homeowner’s Protection Act of 1998 that don’t apply to PMI and they mostly refer to accurate disclosure at closing, annual notices, and other similar items. As for PMI, the most important aspects of what the Act demands have been summarized above.