Private Mortgage Insurance (PMI) has long been touted as a benefit that allows borrowers to purchase properties with less than 20% down. But who is the true beneficiary of PMI? We are told that PMI insurance pays the lender if we default on our mortgage. While true, it doesn’t tell the whole story. There is much more you should know.

This is all the lender must disclose:

• As part of a “good faith” estimate of closing costs, the lender must provide a premium estimate from PMI.

• At closing and annually thereafter, the lender must notify the borrower of available cancellation options. In most cases, PMI can be canceled when the mortgage is paid up to 80% of the sales price or the original appraised value, whichever is less. It will normally be automatically paid off when the loan repayment reduces the mortgage balance to 78%.

What you don’t know and they don’t tell you: 

• The borrower is not a party to the mortgage insurance policy. The lender does not have to disclose the name of the insurer or the amount of insurance purchased. However, the buyer is normally responsible for premiums.

• Lenders can purchase protection for up to 40% or more of the mortgage amount without disclosing to the buyer more than the premium amount. For example, you buy a $200,000 house with a 10% down payment of $20,000 and finance the balance with a mortgage of $180,000. The lender might protect 40%, or a total of $72,000, with mortgage insurance on which you pay the premium.

• Proceeds received by the lender from a PMI policy do not offset any deficiency judgments against you, the borrower. They can collect on the policy and still come after you.

• PMI Insurer can pay anyone along the transaction line for services rendered that reduce the risk of the loan or reduce the expenses of the insurance company. This implies that they can pay commissions to the lender. Understand that it comes out of your pocket.

• The monthly premium for most PMIs is fixed. In other words, as the mortgage balance decreases, presumably along with the risk to the lender, the borrower continues to pay the same premium based on the risk assessment at the time the loan was originated.

• While many lenders will consider allowing the buyer to cancel the PMI when the property’s value increases so that the 80% loan-to-value ratio is achieved, they are under no obligation to do so. In my experience, the lender required me to pay for an appraisal done by an appraisal company selected by them. Additionally, the borrower generally must provide proof that there is no second mortgage on the property.

• The lender can buy PMI, for which it pays the premiums, without notifying the borrower. Funding for these premiums may come indirectly from the borrower through points paid at closing or higher interest rates.

PMI premiums are not negligible. I looked at a loan statement for one of my recent investment properties. On a loan of approximately $200,000, the monthly principal and interest payment was $1,124.93. The monthly PMI was $163.53, or 15% of the P&I. However, I never found out how much insurance was purchased or from whom. If you had carried this property for the 10 years or so necessary to bring the mortgage balance down to 78% of the purchase price, You would have paid more than $19,000 in PMI premiums (almost 10% of the original loan amount).

In the many recent articles on foreclosures, borrowers are urged to contact their lenders immediately when they have financial problems or feel they will not be able to keep their mortgage payments current. They stress that settling with your lender is much better than going through a foreclosure. Even if foreclosure is unavoidable, industry savants recommend working with the lender to facilitate a “short sale,” where the sale price is less than the mortgage amount, thus avoiding the stigma of foreclosure.

Wake up!!If the lender is covered by a PMI policy, will they be more or less willing to work with you? Why would they offer you extended or more favorable terms or allow a short sale when they only need to foreclose to collect on your insurance? Isn’t it ironic? You could pay thousands for coverage that helps pit your lender against your best interests. “A banker is someone who lends you an umbrella, but wants it back when it rains.said my father.