Explaining Private Mortgage Insurance

Filed by admin under Mortgages — 8:28 pm
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If you're like a growing number of Americans, putting 20% down towards the purchase of your home is becoming increasingly difficult. As a result, many lenders now offer loans that require as little as 0% down. This offering, however, doesn't come without cost. Private Mortgage Insurance—otherwise known as PMI—is insurance that protects the lender should you default on your loan. And, while PMI is provided to protect the lender, you are the one responsible for purchasing it.

Do I Have to Get PMI?

If you put down less than 20% on the appraised value of the house, you must have PMI insurance to get a loan.

How Much Does PMI Cost?

PMI charges can vary based on the size of the loan and the amount of your down payment. However, most lenders usually charge up to 1% of the loan. For example, if you purchase a home for $100,000 and put 10% down (or $10,000), you will be charged 1% on $90,000—or about $900 a year.

How Long Do I Have to Keep PMI?

You must keep PMI until you own at least 20% equity in the appraised value of your home. After that, you may cancel your PMI. Be advised that, if your purchased your home before July 29,1999—or if your loan is VA or FHA—you must cancel PMI yourself. Lenders will not notify you when your PMI can be cancelled, nor will they automatically do it for you.

No matter what type of loan you have, or when you purchased your home, make sure to ask your lender when you will be eligible to cancel PMI so that you won't forget. In addition, remember that lenders will only automatically terminate your PMI after you've reached 22% equity in your home. That's two percent more than you need. If you want your PMI cancelled right at 20%–saving you unnecessary PMI payments—you must track your equity yourself and cancel when appropriate.

Do you have a bad payment history on your mortgage or a lien against your property? You may have to wait even longer to cancel your PMI. Remember, PMI is insurance to the lender that you won't default on the loan. If your payments are late or there is a judgment against the property, lenders aren't going to risk giving up the insurance.

How Do I Cancel PMI?

Once you're eligible to cancel PMI, all that's needed is a simple phone call to your lender. If you want—or your lender requires—you can follow up with a certified letter.

Knowing what PMI is—and when you can cancel it—can be almost as important as knowing how much your mortgage payment is. With annual PMI charges costing up to 1% of your loan, forgetting to cancel PMI on time can add up to hundred or thousands of wasted dollars. PMI may be protecting the lender, but it's costing you.

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