The ABCs of PMI: What is Private Mortgage Insurance?

What Is Private Mortgage Insurance

Private Mortgage Insurance (PMI) is a type of insurance that lenders often require from homebuyers who make a down payment of less than 20% of the property’s purchase price. PMI provides a layer of protection for the lender in case the borrower defaults on their mortgage payments. It’s essentially a way for lenders to mitigate the increased risk associated with loans where the borrower has limited equity in the property.

In practical terms, PMI acts as a safety net for the lender by reimbursing them a portion of the outstanding mortgage balance if the borrower fails to meet their payment obligations and the property goes into foreclosure. PMI does not protect the borrower; rather, it safeguards the lender’s interests.

Homebuyers pay for PMI as part of their monthly mortgage payment or as a separate premium, depending on the lender’s policies. The cost of PMI varies based on factors like the loan amount, credit score, and specific loan terms. As the borrower pays down the mortgage and builds equity in the property over time, they may reach a point where they have 20% or more equity. At this stage, it is possible that they can request the removal of PMI payments, as the lender’s risk is reduced.

It’s important for homebuyers to understand the implications of PMI when budgeting for their home purchase. While PMI allows buyers to enter the housing market with a smaller down payment, it does add an extra cost to their monthly expenses. Being aware of how PMI works and knowing when and how to potentially remove it can help homebuyers make informed decisions about their mortgage and overall financial planning.

PMI in Layman’s Terms

1. Getting into the Game: PMI serves as a key to the homeownership door for those of us who don’t have a big down payment. It lets you buy a house with a down payment less than 20%, so you can start building equity and get a house now when you need it.
2. Paying Extra: While PMI helps you buy a home, it’s not free. You pay for it, usually as part of your monthly mortgage payment. The exact amount can vary depending on your loan amount, credit score, and other factors. Think of it like a monthly fee that helps you afford some of the the up front costs of buying your new home.
3. Growing Your Ownership: Every month you make a mortgage payment, you’re not only paying down the loan but also increasing your ownership in the home. This ownership is called equity. As your house’s value goes up over time, your equity grows. Once your equity reaches 20% of the house’s original value, you might be able to say goodbye to PMI.

How Can We Say Goodbye To PMI

According to https://www.consumerfinance.gov/ an official website of the US Government “You have the right to request that your servicer cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage. If you can’t find the disclosure form, contact your servicer.”

“You can ask to cancel PMI earlier if you have made additional payments that reduce the principal balance of your mortgage to 80 percent of the original value of your home. For this purpose, “original value” generally means either the contract sales price or the appraised value of your home at the time you purchased it, whichever is lower (or, if you have refinanced, the appraised value at the time you refinanced).

There are other important criteria you must meet if you want to cancel PMI on your loan:

• Your request must be in writing.
• You must have a good payment history and be current on your payments.
• Your lender may require you to certify that there are no junior liens (such as a second mortgage) on your home.
• Your lender can also require you to provide evidence (for example, an appraisal) that the value of your property hasn’t declined below the original value of the home. If the value of your home has decreased below the original value, you may not be able to cancel PMI at this time. “

And according to ncua.gov some lenders may agreed to terminate coverage when the borrower’s equity reached 20%.

Private Mortgage Insurance is a gateway to homeownership for many, a tool that levels the playing field for those with smaller down payments. Keep in mind there are drawbacks to PMI. It is important to know the terms of your mortgage and under what circumstances you may cancel PMI.

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The information provided in this article about Private Mortgage Insurance (PMI) is intended for general informational purposes only and should not be considered as professional financial or legal advice. I am not a licensed financial advisor or attorney, and the details presented in this article are based on general knowledge. I strongly recommend consulting with a qualified professional expert before making any decisions related to mortgages.