Private Mortgage Insurance (PMI)
Private mortgage insurance is a great tool for those of us who do not have the typical 20% down payment.
A lender will always want you to put down the largest down payment as possible. In general they are looking to receive 20% of the purchase price of the house. Unfortunately not all of us have the funds for a 20% down payment. In a lot of cases you may only have 10% or as little as 3% for a down payment. This is where Private mortgage insurance comes in.
Private mortgage insurance protects the lender if you default on your mortgage. In a way it makes up the difference between what you have for a down payment and the 20% the bank is looking for. Lenders allow lower down payments with PMI because private mortgage insurance will pay the mortgage if you can’t pay or if you go into default on the loan.
Let’s give an example of how PMI works
Let’s say I have $20,000 in the bank for a down payment on a house. If my only option was to put down a %20 down payment I could only afford a house with a maximum value of $100,000. But if I can purchase private mortgage insurance and put down %10 I could afford a house with a maximum value of $200,000. With a %5 down payment my purchasing power goes up to $400,000.
Remember that with lower down payment you have to buy private mortgage insurance. For a loan of $200,000 and a %10 down payment your payments might be around $80 a month. PMI payments are usually paid as part of your monthly mortgage payment and are placed in escrow until it is time to pay the premium
The cancellation of PMI
The Homeowners Protection Act of 1998 requires that PMI be canceled once the owner has reached %22 equity in there home (based on the original property value) on mortgages signed on or after July 29, 1999. Once you have reached the %20 equity mark you can also request that PMI be canceled
If you signed your mortgage before July 29, 1999 then you may request that PMI be canceled once you have reached the %20 mark but they are not required to do so.
There are a few possible exceptions like if you have not kept your payments current; if there liens on the property or you are considered a high risk loan.
You should see what the laws are in your state you might have more protections especially for those who sing before July 29, 1999
© 2007 Scottie Watts