How Mortgage Insurance Restrictions Affect the Mortgage Market

PMI is an unnecessary burden on many homeowners.

PMI is the insurance homeowners are required to take out if they borrow more than 80% of the value of their home. If you make a down payment of less than 20%, your lender may require you to take out PMI. Practically all lenders to require this insurance. In the case of my house, the PMI added $40 each month to my mortgage payment. At the time, only $80 per month was going toward reducing the principal. I could have been paying off the home 50% faster if that PMI payment had gone toward principal. A more expensive home, probably results in a higher PMI payment.

A few dollars more a month might not be a bad deal if the home owner got something out of it, but the home owner is not the beneficiary of the insurance. It is the lender who is the only beneficiary. In the event you default and the lender forecloses, the lender is guaranteed to be reimbursed for funds they can not recover in excess of 80% of the appraised value of the house, but you still lose the house. You may be paying the insurance premium, but the lender received all the benefits. You pay, but you collect nothing.

In theory, the lender stops collecting the PMI payment once the balance on the mortgage is less than 80% of the value of the house. In practice, this is no always the case. The lender is supposed to use your PMI payment to buy a actual insurance policy against possible loss, but it appears some lenders are self insured. That means they keep the payment and absorb the loss should you default.

My experience is that the lender would rather not drop the PMI payment. If they were passing the payment on to an insurance company, why would they care? If they are self insured, it is in their interest to keep collecting the payment as long as possible.

I made some extra payments so that we reached 80% well ahead of schedule. The lender did not miss a beat, but billed us for the PMI on the next payment cycle. I objected and requested that the PMI be removed. I received a tersely worded letter from my lender basically insisting that I continue to pay the PMI as scheduled. I could petition for a removal of the PMI by submitting a current appraisal at my expense, and even if the appraisal showed that my balance was less than 80% of the appraised value, they reserved the right to reject the petition. My interpretation of the letter was that they were saying, “No,” in advance.

Fortunately I had the opportunity to refinance at a lower interest rate and no PMI. Thus I fired my lender.

Perhaps without the PMI, no lender would have been willing to make a 90% loan to me, but homeowners have to be aware that PMI is a financial burden. If you accept PMI as a prerequisite for getting your loan, pay off the first 10 to 15 percent of your loan as quickly as possible and insist that the PMI payment be dropped. Payment of a PMI is like throwing dollar bills down a hole.