Buyers underestimate additional cost of PMI insurance

A new study by TD Bank showed 65 percent of homeowners with private mortgage insurance (PMI) say that the additional cost of PMI insurance prompted them to pay a higher monthly mortgage payment than they had originally expected.

According to the U.S. Department of Housing and Urban Development, a borrower is required to get PMI if the loan exceeds 80 percent of the property’s value (meaning the borrower provided a down payment less than 20 percent of the value). The insurance protects the lender in the case the borrower defaults on his loan.

“PMI has had a definitive impact on many home buyers – including making them rethink or delay the purchase of a home in light of not being able to meet monthly mortgage payments,” said Michael Copley, executive vice president of retail lending at TD Bank, in a statement.

Once the homeowner builds up sufficient equity in the home, PMI is canceled (the homeowner can request cancellation at 20 percent equity, or the lender cancels it automatically at 22 percent, as dictated by the Homeowners Protection Act of 1998).

The survey showed that PMI is fairly common: 37 percent of those who purchased a home in the past 10 years said they were required to have PMI, and 43 percent in the past two years. Forty-five percent of home owners aged 18 to 34 years old have PMI; 37 percent of home buyers aged 35 to 54 have it; and 23 percent of people older than 55 had required mortgage insurance on their loans over the past decade, the study found.

PMI costs an average of $100 a month, according to the report, and FHA loans now require mortgage insurance for the life of the loan.

“While FHA loans may be available, home buyers, especially first time buyers, may not realize the options available to them that don’t require PMI insurance,” added Copley. “Prospective buyers should meet with a lender or financial institution to find a loan solution that meets their needs and monthly budget.”