When a person pays PMI- who gets the money paid into the PMI account?
Is this account a buffer to bail out loans which are defaulted, or is it really purchasing some type of insurance, and when would this insurance kick in?
If a sub prime loan is defaulted, I assume that these loans were either
a) exempt from paying PMI or b) PMI insurance did not cover the default
Just asking for my own knowledge. thx
PMI is paid to an insurer, I think there are 5-6 big ones out there. It works as you're assuming it does (creates pool of money from which covered losses are paid, in defaults).
If your down payment is at least 20%, you don't need to buy PMI. Of course in the new way of buying a house, borrowers were able to get 2nd mortgages, to reduce the amount of cash-down required to avoid PMI. It started with 80-10-10 (10% on a 2nd mortgage, 10% down) but in the extreme there were 80-20s.
You are probably thinking that borrowing 20% + 80% is the same as borrowing 100%, and someone that did that is an obvious candidate for PMI, much more so than the guy who puts 15% down. Bingo! If only the mortgage business was run by people with common sense, instead of finance MBAs from Wharton.
-Tad
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