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9. What is PMI? Can I get rid of the PMI on my loan?
PMI or Private Mortgage Insurance is normally required when you buy
a house with less than 20% down. Mortgage insurance is a type of
guarantee that helps protect lenders against the costs of foreclosure.
This insurance protection is provided by private mortgage-insurance
companies. 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. Therefore,
without mortgage insurance, you might not be able to buy a home without
a 20% down payment.
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.
The decision on when to cancel the private insurance coverage does
not depend solely on the degree of your equity in the 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.
To cancel the PMI on your loan, contact your lender. 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 cancelling the PMI on your loan is to refinance and
to get a new loan without PMI.
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