Private Mortgage Insurance
Does PMI protect the homeowner or the bank?
We refinanced our home with NO CASH out for a fixed rate loan in November 2007. We did it with Washington Mutual, but were talked into doing it via fax and internet where we had to sign our power of attorney, etc. Rate sounded great, we had originally purchased the property for only $65K. No one told us (and we found out, it was in very small print, but not the explanation) about PMI, it was on the first NEW payment!! I contested and was then informed that our homes LTV (loan-to-value) was 86.71%. However, our taxes did not go down, etc. Point is, the charge of $162.00 a month was to protect the lender in case of default. Does that mean the lender will be paid if we default? Thank you very much.
- Private Mortgage Insurance protects the lender, not the borrower.
- The borrower is still liable for a deficiency balance.
- Cancel PMI as soon as you reach 80% LTV.
Private Mortgage Insurance (PMI) is insurance provided by non-government insurers that protects a lender against loss if the borrower defaults. PMI is required on non-government-backed loans that exceed 80% of the value of the property. Government loans guaranteed by the Federal Housing Administration (FHA) require another type of mortgage insurance, called MIP, on mortgages with LTV greater than 80%. This mortgage insurance works similarly to PMI.
Although PMI has the word "insurance" in its name, it is not a free pass for homeowners if they default and the property sells for less than the balance of the loan. A sale for less than the balance of the loan that result in a negative balance is a called a deficiency balance. The PMI underwriter will reimburse the bank for the deficiency balance. The underwriter can then sell the collection account to a collection agency. In other words, PMI protects the mortgage company, but does not protect the homeowner.
If the PMI underwriter forgives the loan then it will issue a 1099-C to the homeowner for imputed income. See the Bills.com resource Mortgage Forgiveness Debt Relief Act to learn how to avoid paying taxes on forgiven mortgage debt.
I hope this information helps you make better money decisions.