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.
