Understanding PMINo one enjoys paying extra monthly expenses, but for many people, private mortgage insurance, or PMI, is a necessity that allows them to successfully apply for a home mortgage. In this guide to understanding mortgage insurance, we’ll learn when lenders require PMI and what makes this mortgage insurance beneficial to the housing industry and the home buyer.

What is PMI?

Let’s say that you want to buy your first house. The house costs $200,000, and you have $17,000 in savings that you can apply to the cost. As your $17,000 represents just 8.5 percent of the home’s $200,000 asking price, the mortgage loan you secure would have to cover 91.5 percent of the home’s value. This is not necessarily a deal-breaker, thanks to PMI.

Whenever a borrower wants to take out a loan that’s equal to more than 80 percent of a home’s value, a lender requires that borrower to pay an extra monthly fee for PMI, a kind of insurance which protects the lender if the buyer were to default on the loan. The amount of PMI paid is based on the amount of the loan.

PMI works like an insurance policy for the bank. The bank is taking an extra risk because the buyer can’t make a 20 percent investment in the home right away. That 20 percent figure is important because lenders know that people who have less money invested in a home are potentially more likely to default on a loan.

The bank gets some protection by requiring that the buyer in this situation pay PMI. This is why a 20 percent down payment toward a home purchase is of significant assistance, as it allows the borrower to avoid paying this insurance fee.

How PMI May be Beneficial to You?

It might seem like PMI is only beneficial for the lender, but that’s not so. You may dislike paying extra money on top of a mortgage payment each month, but PMI allows you to reap the benefits of home ownership without needing to have a large amount of cash available for a down payment. Basically, PMI helps you secure a loan when you wouldn’t be able to do so otherwise.

When to Stop Paying PMI

You’ve already learned that PMI only applies to borrowers who get a loan for more than 80 percent of a home’s value. Eventually you will have paid enough toward your mortgage that you will have invested money equal to 20 percent of the home’s original value. This money that you put into your home is called equity.

When you reach 22 percent equity in a home, you can stop paying PMI, thanks to a law called the Homeowners Protection Act. Established in 1998, this law allows for the automatic termination of private mortgage insurance once a homeowner reaches the 22 percent equity mark. Homeowners can also request that PMI be cancelled when they reach 20 percent equity.

You should know, though, that there are exceptions to this law. If you haven’t paid your mortgage on time, have a high-risk loan, or have tax liens on your property, you might not qualify to stop paying PMI. But if you do qualify, it’s nice to be rewarded for making a solid investment in home ownership.

Source:  movingtoday.com

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