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 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.
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.
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.
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