PMI: Private Mortgage Insurance
Private Mortgage Insurance helps you get the loan
Private Mortgage Insurance, also known as PMI, is a supplemental insurance policy you may be required to obtain in order to get a mortgage loan. PMI is provided by private (non-government) companies and is usually required when your loan-to-value ratio — the amount of your mortgage loan divided by the value of your home — is greater than 80 percent.
PMI isn’t a bad thing — it allows you to make a lower down payment and still qualify for a mortgage loan. In fact without PMI, many of us would not be able to purchase our first home.
How is PMI calculated?
Your PMI premium is fixed based on plan type (loan-to-value ratio, loan type, loan term, etc.) and is not related to your particular credit history or other individual characteristics. PMI typically amounts to about one-half of one percent of your mortgage amount annually, according to the Mortgage Bankers Association, and the premium payment is usually rolled into your monthly mortgage payment. On a $200,000 mortgage, you may be paying $1,000 per year for PMI.
Eliminating Private Mortgage Insurance
Beginning in 1999, lenders have been legally required to cancel a borrower’s Private Mortgage Insurance (PMI) at the point his loan balance (for loans made after July of ’99) goes under seventy-eight percent of the purchase price, but not at the time the borrower’s equity gets to more than twenty-two percent. (A number of “higher risk” loan programs are not included.) The good news is that you can cancel your PMI yourself (for your mortgage loan closing after July ’99), no matter the original price of purchase, after the equity gets to twenty percent.
Keep track of payments
Study your monthly statements often. Also be aware of what other homes are being sold for in your neighborhood. Unfortunately, if you have a new mortgage – five years or fewer, you probably haven’t begun to pay much of the principal: you are paying mostly interest.
Proof of Equity
You can start the process of PMI cancelation as soon as you calculate that your equity has reached 20%. You will first notify your lender that you are requesting to cancel PMI. Lenders require proof of eligibility at this point. A state certified appraisal documented on the appropriate form (URAR-1004 – Uniform Residential Appraisal Report) is all the proof you need and your lender will probably require one before they’ll cancel PMI.
