Private Mortgage Insurance:
What is it and why do I have to pay for it?
PMI is an abbreviation for Private Mortgage Insurance. PMI is a form of insurance that the borrower must pay in order to compensate for NOT having a 20% down payment. This insurance coverage is designed to protect mortgage lenders against financial losses due to default and foreclosure. Please do not confuse PMI with Credit Life or Credit Disability Insurance that are designed to pay off your mortgage in the event of one's loss of employment due to injury or the death of a spouse.
PMI allows you to purchase a new home with less than a 20% down payment. It allows mortgage lenders to accept lower down payments and it is an excellent avenue for getting into your dream home with limited funds available. Nearly half of all borrowers put less than 20% down when buying a home.
PMI should be considered a short-term expense due to the expected appreciation of your home. When your home increases in value over a period of time, let's say 2 years or so, and your mortgage balance lowers slightly, you will have an increase in your home's equity. PMI can be removed from your mortgage after the following criteria are followed:
- A minimum of 12 monthly mortgage payments have been paid and paid on time (no overdue payments).
- 20% Equity in your home can be proven with a new appraisal on your home.
- A written request is sent to your mortgage service requesting that your PMI be removed.
The key factor in utilizing Private Mortgage Insurance is that it allows you to put a smaller down payment on your new home and any other funds can be used towards paying off debts, investments or maybe buying some new furniture. Please note that removing PMI is at the lenders' discretion.