Busting the 3 biggest Lee’s Summit private mortgage insurance myths

Olga Marquez
Olga Marquez
Published on September 19, 2018

 

One of the most frustrating issues we’ve dealt with over the past few years in Lee’s Summit is the confusion over private mortgage insurance (PMI). Folks on the internet aren’t helping clear the confusion; instead, many are feeding Lee’s Summit 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 Lee’s Summit 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.

Lee’s Summit, What is PMI?

Private mortgage insurance protects the lender if a Lee’s Summit homebuyer 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, Lee’s Summit. 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 Lee’s Summit 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 Lee’s Summit 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 on your Lee’s Summit home, you can cancel the PMI premium when you reach the 20 percent equity level.

By law (Homeowners Protection Act of 1998), however, your Lee’s Summit 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 your Lee’s Summit home 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, Lee’s Summit.

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 Lee’s Summit tax specialists aren’t holding out hope. So, for now at least, “PMI is tax deductible” is a myth.

We aren’t mortgage professionals so we urge you to contact your local Lee’s Summit lender or financial advisor if you have questions about private mortgage insurance.

One of my preferred lenders has closed the most government loans in Missouri, and is ranked and listed on Missouri’s website. She is literally in my office right next to me. (I am fortunate to have her!) If you would like to make an appointment to discuss your options, contact me for an appointment.

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