Private Mortgage Insurance (PMI) is a type of insurance that lenders often require borrowers to purchase when they have a down payment that is less than 20% of the home's purchase price. Its primary purpose is to protect the lender in case the borrower defaults on their loan payments.
Here's how PMI works:
Initial Payment: When you buy a home with less than a 20% down payment, the lender typically requires you to pay for PMI as part of your monthly mortgage payment or as a one-time upfront premium at closing.
Cost: The cost of PMI varies depending on factors such as the size of your down payment, your credit score, and the type of mortgage you have. It typically ranges from 0.3% to 1.5% of the original loan amount per year.
Cancellation: Once you've built up enough equity in your home (usually when your loan-to-value ratio reaches 80% or less), you may be eligible to cancel PMI. There are generally two ways to do this:
Automatic Termination: For most loans, PMI automatically terminates once your loan-to-value ratio reaches 78% of the original value of your home, based on the initial amortization schedule.
Requesting Removal: Alternatively, you can request to have PMI removed once you believe you've reached the necessary loan-to-value ratio. This typically involves contacting your lender and providing documentation such as an appraisal demonstrating that your home's value has increased or that you've made additional payments to reduce your loan balance.
Exceptions: It's worth noting that certain types of loans, such as FHA loans, have different PMI rules. For example, FHA loans require PMI for the life of the loan if the down payment is less than 10% or for the first 11 years if the down payment is 10% or more.
Refinancing: Another way to get rid of PMI is by refinancing your mortgage. If your home has appreciated in value or you've paid down your loan balance enough to reach a loan-to-value ratio of 80% or less, you may be able to refinance into a new loan without PMI.
In summary, PMI is a cost that borrowers with less than a 20% down payment may have to pay to protect lenders. However, it's possible to have PMI removed once you've built up enough equity in your home, either through automatic termination or by requesting removal. Refinancing may also be an option to eliminate PMI if you're unable to reach the necessary loan-to-value ratio through regular payments.
