Private Mortgage Insurance (PMI)

What is private mortgage insurance and When do you need to purchase it?

You may think that after you pay closing costs and the real estate agent, the only expense left is your monthly mortgage and maybe some new paint. However,lenders may require you to purchase PMI if your down payment is less than 20 percent of the sales price or the appraised value of the home. Normally, PMI premiums are added to your monthly mortgage payment. If you are making a down payment of less than 20 percent, be sure you know if PMI is required and how much the PMI will add to your monthly payments.

Can you Avoid PMI?

If you have less than the 20% down payment needed to avoid a mortgage insurance requirement, there are generally two solutions:

  • . Find a less expensive home. The less expensive the home, the lower the down payment. If you still can’t afford a 20 percent down payment, get as close as you can to help pay off PMI more quickly.
  • . Use a second mortgage (sometimes referred to as a “piggy-back loan”) to make up the difference. We are happy to recommend lenders to discuss options with and strategize.

How to remove PMI from loan?

Federal law generally provides two ways for you to remove PMI from your home loan:

  1. Request PMI cancellation

The Homeowners Protection Act gives you the right to request that your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. If you meet these requirements your lender generally must cancel your PMI when you request it. If you do renovations that increase the value of your home or if home sales in your neighborhood are high and this increases your home value you may be able to request an appraisal and cancel your PMI prior to when you would have paid off 20% of your home’s value.

  1. Automatic PMI termination

Even if you don’t ask your lender to cancel PMI, your lender still must terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. You also need to be current on your payments on the anticipated cancellation date. Otherwise, PMI will not be terminated until shortly after your payments are brought up to date.

If your loan is guaranteed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA), these rules generally wont apply. If you have lender-paid mortgage insurance, different rules apply. For more information, please feel free to contact us.