If you are in the market to purchase a new home and have done research on obtaining a mortgage you have likely heard the term Private Mortgage Insurance. The term PMI is thrown around a lot in the mortgage world; however, many consumers are unaware of what it is and why it can be required.
Defining Private Mortgage Insurance
PMI is required when you put less than 20% down on a new home purchase or when you have less than 20% equity when you refinance. Private Mortgage Insurance is an insurance policy that insures the lender in the event of a default on a mortgage. Without this insurance policy most lenders will not offer financing with less than 20% down as the risk is too great.
Who Pays PMI
Unlike other types of insurance which you pay to protect your interest in an asset, you pay Private Mortgage Insurance to protect the lenders interest in your new real estate. There are three primary ways in which PMI can be paid. The most common form is monthly PMI which requires a monthly premium paid on top of your normal Principal Interest Tax and Insurance payment. PMI can also be paid upfront as the borrower can pay a lump sum fee at closing to avoid the monthly fee or the borrower can choose to have the lender pay the PMI in exchange for a higher interest rate.
Can PMI Be Removed?
Once you pay down your mortgage to 78% of the original purchase price or appraised value, whichever is less, and you have paid PMI for at least two years your PMI must be cancelled. The Homeowners Protection Act requires that loans made after 1999 include notifications to the borrower when you arrive at this point in your payments. A borrower is able to request that PMI be removed prior to meeting these requirements; however, it is lender discretion and they do not have to remove the PMI even if your home value has increased.
When determining which form of PMI is best for your situation there are many factors to consider. Contact us today to review which option fits your situation best.