Private Mortgage Insurance (PMI)

December 16, 2008
Matt Isleib

 

Is often misunderstood by the consumer or borrower. So to help you understand what exactly it is we are going to break it down in a very simple format.

 

What is PMI? It is added insurance that most lenders require if you have less than 20% equity in your home. Simply put, if you are purchasing a home and putting down less than 20% as a down payment, let’s only 10% you will have PMI on your loan. On the flip side if you are refinancing and have less than 20% equity in your home your loan will have PMI.

Another definition of PMI is it is simply an added insurance policy for the lender or bank. If you are putting down 5 or 10% and end up defaulting on the loan the PMI policy helps the lender or bank recoup some losses. look at it as a risk assessment on your bank or lenders behalf. The less you have vested in the loan the greater the risk for the bank and hence the need for PMI.

 

How Long do I have to pay PMI? It depends on how much you put as a down payment or how much equity you had when you refinanced. Your lender by law has to remover your PMI once you have payed your loan down to 78% loan to value. You also have the right to request that your lender remove the PMI if you feel that your property has increased in value in which case an appraisal may be necessary.

 

Benefits of PMI If you do not have 20% to put down as a down payment or do not have enough equity in your home to make your loan to value 80% PMI plays an important role for you. As I mentioned earlier PMI is basically an added insurance policy for lenders to protect against loss if you are putting a smaller down payment down or refinancing and do not have a lot of equity. Basically if you fall into the category of someone who does not have 20% to put down and you are the majority PMI enables you to  purchase and not have to wait to accumulate that nest egg for a down payment to buy a home