Private Mortgage Insurance (PMI)
PMI (Private Mortgage Insurance) is required from a borrower when they do not put 20% or more down on a purchase of a house. PMI is protection for the lender against the costs of foreclosure. Mortgage insurance is provided by private mortgage insurance companies, and allows lenders to lend in circumstances they generally would not (more than 80% of the properties market value). Although no one likes paying their PMI each month, it allows many people the opportunity to purchase a house without a large cash down payment.
The cost of PMI fluctuates with each individual case, and it is relative to your down payment, and the overall loan amount. For example, the cost of PMI is greater for a 5% down payment as opposed to a 10% down payment, and the cost of PMI is more on a $200,000 mortgage than a $100,000 mortgage. The cost is generally in addition to your monthly principal & interest payment.
PMI is handled differently by all lenders and the terms agreed upon in your agreement with them. The decision to cancel PMI will be based upon the lender's guidelines. In general, lender's will cancel PMI when the equity in the house reaches 75-80%; but also depends on time period since the purchase, as some lenders require 1-2 years PMI payments before they will consider terminating your PMI. Some may allow you to remove PMI prior to the time period if significant upgrades/repairs, etc. have been performed on the property. Your first step in removing your PMI is contacting your current lender and getting all the terms in writing. Once you have read and determined the feasability of removing your PMI it is time to get a professional, independent appraisal performed on the property to obtain a professional opinon of market value. The appraisal will be sent directly to the lender and they will make their decision based upon the results of that appraisal.
This is a basic guideline provided to help you better understand the basics of PMI; all final documentation regarding the specifics of your specific situation must be obtained from your specific lender. Please feel free to call us about any questions you have or to discuss the appraisal process further. The cost of your appraisal will generally pay for itself in 1-3 months, and save you money every month thereafter!
For more information on PMI and the Homeowners Protection Act, try one of these links: