PMI or Private
Mortgage Insurance is normally required when you buy
a house with less than 20% down. Mortgage insurance
is a type of guarantee that helps protect lenders
against the costs of foreclosure. This insurance
protection is provided by private mortgage-insurance
companies. It enables lenders to accept lower down
payments than they would normally accept. In effect,
mortgage insurance provides what the equity of a
higher down payment would provide to cover a
lender's losses in the unfortunate event of
foreclosure. Therefore, without mortgage insurance,
you might not be able to buy a home without a 20%
down payment.
The cost of PMI
increases as your down payment decreases. Example:
The cost of PMI on a 10% down payment is less than
the cost of PMI on a 5% down payment. Your PMI
premium is normally added to your monthly mortgage
payment.
The decision on when
to cancel the private insurance coverage does not
depend solely on the degree of your equity in the
home. The final say on terminating a private
mortgage-insurance policy is reserved jointly for
the lender and any investor who may have purchased
an interest in the mortgage. However, in most cases,
the lender will allow cancellation of mortgage
insurance when the loan is paid down to 80% of the
original property value. Some lenders may require
that you pay PMI for one or two years before you may
apply to remove it.
To cancel the PMI on
your loan, contact your lender. In most cases, an
appraisal will be required to determine the value of
your property. You will probably also be required to
pay for the cost of this appraisal. Another way of
cancelling the PMI on your loan is to refinance and
to get a new loan without PMI.
