PMI: Private Mortgage Insurance
Commonly referred to as PMI, private mortgage insurance is, for all intent and purposes, a loan taken out to protect the lender from a homeowner who might default on his loan. For many home buyers, private mortgage insurance may not be the most celebrated form of insurance, but, for some, it’s an absolute must. In years past, many lenders only gave mortgages to people who could put down 20% or more down on the purchase of their new home. For those who wouldn’t typically be able to afford a large down payment, PMI is a “foot in the door,” allowing for home ownership with as little as a 0%-5% percent down payment.
Since PMI only insures the 20% loss, PMI is usually ended when the homebuyer reaches the 20% equity mark. Consequently, it’s sole and only benefit to you is a lower down payment mortgage. However, if PMI payments are never stopped, this leads to hundreds and possibly thousands of dollars of the home buyer’s money being wasted.
NOTE:
Be careful not to confuse private mortgage insurance and mortgage protection insurance. Though they sound similar, they’re two totally different types of insurance products. Mortgage protection insurance is essentially a life insurance policy designed to pay off your mortgage in the event of your death. Whereas, private mortgage insurance protects your lender, allowing you to finance a home with a smaller down payment. These two products should never be construed as substitutes for each other.
So, you don’t like the idea of making those extra mortgage insurance payments? Here are a few ways to eliminate mortgage insurance altogether:
- Get an appraisal. Once the equity in your home falls below the 80% loan-to-value-ratio required by your lender, you can eliminate your private mortgage insurance. You would, of course, have to present your lender with a valid home appraisal before final termination.
- Make home improvements. By making home improvements, you’re increasing the market value of your house, getting you that much closer to the all-important 80% “LTV” level.
- Paying down your mortgage may also be a viable option. Making even small additional payments each month can make a big difference over time. Once you get that loan-to-value-ratio below 80%, you’ll no longer be required to make PMI payments.
- Thanks to The Homeowner’s Protection Act (HPA) of 1998, you have the right to request private mortgage insurance cancellation when you reach a 20% equity in your mortgage. What’s more, lenders are required to automatically cancel PMI coverage when a 78% loan to value is reached.
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