What is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance, or PMI as it is commonly abbreviated, is additional insurance required for most homeowners. Its main function is to protect lenders against loss in the event that borrower’s default on a loan. Therefore under most circumstances you will be required to pay private mortgage insurance. The general rule is if you obtain a loan from a lender that is more than 80 percent of your new home’s value, you will most likely be required to pay Private Mortgage Insurance. In other words, PMI is usually only required if the buyer’s down payment is less than a 20 percent.

The Basics

The cost of PMI varies with each year and is dependent on several factors such as on the “loan term, loan type, proportion of the total home value that is financed, the coverage amount, and the frequency of premium payments (monthly, annual, or single)”1. It is also important to mention that PMI is expressed in terms of the total loan value in most cases and is often no longer required once the principal is reduced to 80% of value1.

The Benefits

Listed above is a primary benefit for lenders to require Private Mortgage Insurance. Lenders can rest easy because PMI protects them if a borrower defaults on a loan. However there are benefits that PMI provide for borrowers as well, so there is something in it for some borrowers. For instance, homebuyers who couldn’t normally afford 20 percent down payment for a home, PMI allows an opportunity to purchase a home without making a hefty down payment . Therefore, private mortgage insurance has benefits for both lenders and homebuyers or borrowers. However, homebuyers who could normally afford the sizable down payment may lose out from PMI. For these home buyers cancelling PMI may be a reasonable option. The following will address going about cancelling your PMI.

Cancelling PMI

If PMI hinders you as a borrower rather than helps you, there are a few ways to end your PMI payments. As mentioned earlier, borrowers can avoid PMI altogether, by contributing a down payment more than 20 percent of the home’s value. However if this is not possible for borrowers another strategy to avoid PMI is through a piggy back loan to make up the difference2. Another way to avoid PMI is through appraisal or paying down the principle1. If the value of your house has increased in recently, you may be able to cancel your private mortgage insurance. More specifically, when your mortgage falls below the 80 percent loan to value ratio, present your lender with a valid appraisal to terminate your PMI2.

This article just covered the basics involved with Private Mortgage Insurance. If you would like more information concerning this topic please visit the links provided below in the sources section.


Sources:
1http://en.wikipedia.org/wiki/Lenders_mortgage_insurance
2http://www.themoneyalert.com/mortgageinsurance.html
http://www.frbsf.org/publications/consumer/pmi.html

Sybria White

Sybria White

Sybria White is a senior at the University of North Carolina at Chapel Hill. Upon graduation in May 2010, she will leave Carolina with a Bachelor’s Degree in Sociology, a Certificate in Career Development and will be awarded a Public Service Scholar. She plans to attend graduate school to pursue a Master’s Degree in Public Health following taking a year off to contribute to a National Service Program, such as AmeriCorps. Her undergraduate career has taught her the value of a sociological perspective, which has influenced her dedication to public service. She is a volunteer for W.D. Hill Recreation center, Peer mentor for minority students and has served as an active member of several campus organizations such as Sociology club, North Carolina Health Careers and Access Program, Community Government, and Minority Advising just to name a few.

Apart from contributing public service and active involvement on campus, Sybria is very passionate about creative writing and writing in general and hopes to bring a sociological point of view to her articles. Her interests outside of writing and public service include reading books concerning fashion and spending time with her family.

A well rounded curriculum involving Business and English academics in addition to sociology, have helped shaped this young writers’ unique voice. She is eager to share her newly acquired skills and looks forward to helping others approach every day problems from a new, and perhaps, sociological outlook.
Sybria White

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