Private Mortgage Insurance (PMI) is a mandatory insurance policy for conventional loans which insures a lender against loss in the event that the homeowner stops making payments on a mortgage loan. Mortgage insurance helps people to become homeowners who might not otherwise qualify because they don’t have 20% to put down on a home.
When Is Private Mortgage Insurance Required?
PMI is required when a conventional home loan is used to purchase or refinance a house; and, the borrower makes a down payment of less than twenty percent, or has less than 20 percent equity in the home.
Conventional loans are loans which are backed by Fannie Mae or Freddie Mac and they’re available via all major lenders including Wells Fargo, Bank of America, Quicken, JPMorgan Chase, and others.
PMI is insurance for the lender, paid by the homeowner. It’s the homeowner’s insuring of the lender against its own default. Should the homeowner should ever stop paying on its mortgage, the insurance policy get “cashed”, and the bank gets paid for its losses.
The less you put down for a down payment on a conventional loan, the larger your mortgage insurance policy will be.
PMI means lenders are more likely to offer low down payment, high-ratio mortgage loans. That’s good news if you need to buy a home with anything less than 20% down.
As a homeowner, once you can show that your home’s equity position has reached twenty percent, you reserve the right to ask your lender to have your PMI removed. In many cases, your PMI payments can be canceled immediately.
You have the right to request that your servicer cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 78 percent of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage. If you can’t find the disclosure form, contact your servicer.
Ways to Get Rid of PMI
There are two ways by which your home equity can reach the required levels for PMI cancelation.
One way to get rid of PMI is to simply take the purchase price of the home and multiply it by 78%. Then pay your mortgage down to that amount. So if you paid $250,000 for the home, 78% of that value is $195,000. Once you pay the loan down to $195,000, you can have the PMI removed.
Request a home appraisal from your lender which shows 20% home equity. Your servicer may agree to remove the PMI if the home is still your primary, you have a good payment history, and the appraisal supports 20% equity.
Lenders are required by law to cancel private mortgage insurance once you pay down the principal to 78% of your acquisition price. If you have any questions on PMI or need help with purchasing a home please contact us.
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