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.
