PMI or Private Mortgage Insurance (known by a few aliases: PMI, MI, MIP) is required by some lenders when you buy a house with less than 20% down or refinance an existing mortgage resulting in more than an 80% LTV. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. 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.
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.
Statistics show that half of all home mortgage loans have PMI policies associated with them. One alternative from paying PMI is taking out a piggyback loan. In a piggyback loan scenario a first mortgage is for 80% LTV and a second mortgage is for the 5-20% LTV, depending on the amount of down payment.
The decision on when to cancel the private insurance coverage does not depend solely on the amount of equity in your 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.
Contact your lender to see about canceling the PMI on your loan. 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 canceling PMI is to refinance and to get a new loan without PMI.
We have many alternatives to paying PMI. See our description
of Loan Types for these alternatives, like Piggyback Mortgages.
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