What is PMI?
Private Mortgage Insurance, also known as PMI, is a supplemental insurance policy you may be required to obtain in order to get a mortgage loan. PMI is provided by private (non-government) companies and is usually required when your loan-to-value ratio — the amount of your mortgage loan divided by the value of your home — is greater than 80 percent.
PMI isn't a bad
thing — it
allows you to
make a lower
down payment
and still
qualify for a
mortgage loan.
In fact without
PMI, many of us
would not be
able to
purchase our
first home.
How is PMI
calculated?
Your PMI premium is fixed based on plan type (loan-to-value ratio, loan type, loan term, etc.) and is not related to your particular credit history or other individual characteristics. PMI typically amounts to about one-half of one percent of your mortgage amount annually, according to the Mortgage Bankers Association, and the premium payment is usually rolled into your monthly mortgage payment. On a $200,000 mortgage, you may be paying $1,000 per year for PMI.
Eliminating PMI
For loans made
after July
1999, lenders
are required by
federal law to
automatically
cancel PMI when
the loan
balance falls
below 78
percent of your
purchase price
— not when you
achieve 22
percent equity,
which will
happen much
more quickly
with rising
property
values.
(Certain
"higher risk"
loans are
excluded.)
But you
have the right
to cancel PMI
(for loans made
after July
1999) once your
equity reaches
20 percent,
regardless of
the original
purchase price.
Keep track of your principal payments. Also keep track of what other homes are selling for in your neighborhood. If your loan is under five years old, chances are you haven't paid down much principal — it's been mostly interest. But property values in many parts of the country have gone through the roof lately. And that can earn you 20 percent equity even if you haven't paid down much principal.
When you think you've reached 20 percent equity in your home, you can begin the process of freeing yourself from PMI payments! You will need to notify your mortgage lender that you want to cancel PMI payments and you'll need to submit proof that you have at least 20 percent equity. A state certified appraisal on the appropriate form (URAR- 1004 uniform residential appraisal report for single family homes) is the best proof there is — and most lenders require one before they'll cancel PMI.
