What Is PMI (Private Mortgage Insurance)

With PMI, you can get into the house you want without making a 20 percent down payment.

Thanks to private mortgage insurance (PMI) the 20 percent down payment is pretty much a thing of the past. Essentially it works like this: In exchange for being able make a down payment as low as 3.5 percent (depending on the lender and your situation), you agree to pay private mortgage insurance until you have paid the equivalent of 20 percent of your home’s purchase price. This is protects the lender by allowing them to recoup their losses in the event that  you default on your loan. Although you are paying the premiums, it’s the mortgage lender — not you — who is protected by private mortgage insurance.

Since it can take years of saving to accumulate the 20 percent down payment to purchase a home,  PMI lets you buy a home sooner. In 2012, the median home price of existing single-family homes in  Columbus was $167,518. Without private mortgage insurance, that would mean that you would need $33,503 in cash in order to get a mortgage loan.

Your  PMI premiums are likely to be higher if you make a three to five percent down payment, and lower if your down payment is 10 percent or more. You might also have higher payments if you have an adjustable rate mortgage rather than a fixed-rate mortgage.

The premiums for private mortgage insurance are usually included in your monthly mortgage payments and are held in escrow until the payments are due to the mortgage insurance company. PMI premiums are typically around one-half of 1 of the purchase price of the home, which is about $125 a month on a $300,000 mortgage.

You will be responsbile  for private mortgage insurance payments until you have paid down 20 percent of the original value of your home. This can take a while because most of your mortgage payment goes to interest, not principal, in the early years of your loan. But if the value of your home has grown, either because of market conditions or improvements to the home, you can contact your lender and request that your private mortgage insurance be canceled early.

In addition, federal law requires automatic cancellation of private mortgage insurance once you have achieved 22 percent equity in your home — in other words, when you have paid down 22 percent of the value of the home at the time of the loan. The law applies to most home mortgages signed on or after July 29, 1999.

There are exceptions to the automatic cancellation of private mortgage insurance, including high-risk or delinquent loans. But the law does protect most homeowners from unknowingly having to pay hundreds or even thousands of extra dollars for private mortgage insurance.

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