What Is Private Mortgage Insurance?

  • PMI is additional insurance designed to protect the lender from people who default on their loans and have less than 20% equity in their property.

  • About 30% of home buyers can´t afford a 20% down payment. PMI, however, allows them buy a house years before they´d normally be able to afford it.

  • Mortgage brokers say that home buyers who make small down payments are likelier to default than those who put down the traditional 20%. Therefore, lenders require those buyers to purchase PMI to insure the lender against the extra risk ? and ensuing cost ? of foreclosure.

  • PMI allows you to buy a home with a small down payment, and helps the lender re-sell your mortgage on the secondary market to an institutional investor.

  • Most states have regulations prohibiting lenders from making a loan in excess of 80% of the purchase price without PMI.

  • PMI is paid in monthly installments, a year in advance; a year´s reserve is paid in full at closing. The premium depends upon the price of the home and the type of mortgage.

  • You don´t necessarily have to pay PMI premiums for the life of the loan. After you´ve accumulated 20% equity in your house, you can usually cancel your PMI premiums (whereupon you´ll get your year´s reserve back). Always make sure, however, that you get a cancellation policy in writing.

  • The company that purchased your mortgage on the secondary market will be the one who decides if and when PMI can be cancelled, and they usually provide a specific set of rules.

  • Most lenders will look at the following:

    • An appraisal ? the lender will want to see that the home´s value has appreciated enough to give you the 20% equity you need to cancel PMI.

    • Payment history ? lenders will want to see a clean payment record for the previous year or two.

    • Length of ownership ? most lenders will make you wait at least two years before you can cancel PMI, to develop a track record of on-time payments.

  • Many buyers ask their lenders for a document stating that their PMI payments will stop automatically when their equity reaches 20%. The most important thing for you to know is that it´s up to you to contact the lender and make sure any agreement is clearly spelled out.