if your down payment on a home is less than 20 percent of the appraised value or
sale price, you must obtain private mortgage insurance, known as PMI, with your
lender. This will enable you to obtain a mortgage with a lower down payment
because your lender is now protected against any default on the loan.
charges vary depending on the size of the down payment and the loan.
buyers need PMI because 20 percent of the sale price on a home is a lot of
money; for instance, that's $20,000 on a $100,000 home. Home buyers must
maintain the PMI premiums until they cross that one-fifth-of-principal
threshold, a process that can take years in longer-term mortgages.
Keep track of your payments on the principal of the mortgage. When you
reach the point where the loan-to-value ratio hits 80 percent, notify the lender
that it is time to discontinue the PMI premiums. The Homeowners Protection Act
of 1998, which took effect in 1999, requires lenders to tell the buyer at
closing how many years and months it will take for them to reach that 80 percent
level and cancel PMI. Lenders must automatically cancel PMI when the balance
hits 78 percent.
does allow lenders to continue requiring PMI all the way down to 50 percent
equity for so-called high-risk borrowers. Loans for people with spotty
credit histories and higher debt-to-income ratios also fall into this category.
Additionally, some FHA loans require payment of PMI throughout the entire life
of the loan.
There are some mortgages that do not require PMI, speak with your
lender about it!