Mortgage Insurance, also known as Private Mortgage Insurance (PMI), is something that’s required on conventional mortgage loans with a down payment less than 20 percent. While you as the borrower may never reap direct benefit from your PMI policy, it is, in fact, a real insurance policy that enables you to lower your down payment through protecting the lender if you default.
What is Private Mortgage Insurance?
Private mortgage insurance protects mortgage lenders from losses if you default on your loan and your home goes into foreclosure. Essentially, mortgage PMI covers the lending institution for any shortages between the cost of liquidating a home and the amount borrowed with little or no down payment or ‘skin in the game’. Mortgage insurance and property equity is of particular importance to lenders should the housing market pulls back from high valuations.
Do I have to have PMI?
When a mortgage applicant wants a home loan but can’t come up with 20% equity up front as a down payment, the mortgage lender assumes a bigger risk. Therefore, today’s loan program usually require the borrower to purchase private mortgage insurance to protect them in case of default and foreclosure if they have less ‘skin in the game’.
How much does PMI cost?
Historically, premium for private mortgage insurance equal about .5 percent of your loan total annually. That means if you’re approved for a mortgage of $100,000, your PMI premium for the first year will be around $500. A $200,000 mortgage would mean you pay around $1,000 per year in PMI, and so on. Depending on your mortgage program, your premiums could be reduced a small amount each year based the amount that you still owe.
When are the PMI premiums due?
Most lenders require that you pay the first yearís premium at closing, so donít forget to add it in when youíre figuring out your closing costs. For subsequent years, youíll pay it along with your monthly mortgage payment.
Do I have to pay for PMI until my mortgage is paid off?
No. The length of time you have to maintain PMI varies from state to state and lender to lender, but you can generally cancel your PMI when you have between 20% and 25% equity in your home. The actual PMI percentage depends on the default mortgage rate in your state. There are usually other requirements as well, such as no late payments in the year before you request cancellation, and no other mortgages or liens against your property.
How do I cancel my PMI?
Under the provisions of the HPA, your lender must automatically terminate your PMI when youíve paid down your mortgage to 78% of the original purchase price or the appraised value of your home when you bought it, whichever is less, as long as your mortgage payments are current when you reach 78%. If the mortgage was considered a high risk loan, it can be when you reach 77%.
What does PMI insurance do?
Hopefully, your private mortgage insurance policy will never be used. If you do default however, PMI mortgage insurance covers the difference between your down payment and the portion of your mortgage that’s required to be insured when you borrowed the cash. The amount required to be insured is usually anything above 20% of the sales price, or 80% loan-to-value.