One of the most frustrating issues we’ve dealt with over the past few years in Chicago Real Estate is the confusion over private mortgage insurance (PMI). Folks on the internet aren’t helping clear the confusion; instead, many are feeding it with misinformation.
The truth is, the average down payment on a mortgage is around 11 percent, according to the National Association of Realtors. That’s a whole lot of homebuyers who are required to purchase PMI. Because of that, we’ve decided to help smash the prevailing myths about this despised yet necessary program.
What is PMI?
Private mortgage insurance protects the lender if the buyer defaults on the loan and it is generally required of borrowers who pay less than 20 percent as a down payment.
There are exceptions to this that we’ll explore, below.
PMI typically costs between 0.5 percent to 1 percent of the loan amount, each year. “At 5 percent down, private mortgage insurance (PMI) costs $150 per month on a $250,000 home,” according to the U.S. Department of Veterans Affairs.
Myth Number 1: “Government-backed loans don’t require PMI”
This one is partially true. The VA loan doesn’t require PMI. However, the loan does require most borrowers to pay what is known as a “funding fee” which helps mitigate the burden on the taxpayer should the borrower default on the loan.
FHA does require that borrowers purchase mortgage insurance, although theirs is called MIP, for Mortgage Insurance Premium. There is both an upfront fee and a monthly premium payment required.
The former is typically the same for all borrowers (1.75% of the base loan amount), while the latter depends on a number of factors, including the loan amount, the term and the loan-to-value ratio. The premium amount changes annually, so check with your lender to learn about current MIP rates.
Myth Number 2: “You cancel PMI when you reach 20% loan-to-value”
This myth is partially true. If you have a conventional loan you can cancel the PMI premium when you reach the 20 percent equity level.
By law (Homeowners Protection Act of 1998), however, your lender must cancel the policy when you accumulate 22 percent of the home’s original purchase price in equity.
If, on the other hand, you have an FHA-backed loan, you can’t cancel the MIP unless you sell or refinance the loan.
Myth Number 3: “PMI is tax deductible”
This was true a year ago, but for 2018 tax returns, at least as of September 2018, this deduction is no longer available.
The ability to deduct PMI is one of those tax code provisions that expire every December 31st. Since its inception in 2007, Congress has renewed the deduction every year, sometimes at the last minute.
Hopefully, it will be again, but most tax specialists aren’t holding out hope. So, for now at least, “PMI is tax deductible” is a myth.
I’m not a mortgage professionals but Rodrigo Ruiz at Guaranteed Rate is and so is Esho Youkhana at LoanDepot and they are both here in Chicago. I urge you to contact your lender or financial advisor if you have questions about private mortgage insurance. If you don’t have one, Rodrigo or Esho can help. I can however, help you find the home of your dreams. Have any questions contact me at [email protected] or schedule a call.
