What Is Private Mortgage Insurance? - Los Angeles Mortgages

• PMI is additional insurance designed to protect the lender from people who default on their loans and have less than 20% equity in their property.

• About 30% of home buyers can’t afford a 20% down payment. PMI, however, allows them to buy a house years before they’d normally be able to afford it.

• Mortgage brokers say that home buyers who make small down payments are likelier to default than those who put down the traditional 20%. Therefore, lenders require those buyers to purchase PMI to insure the lender against the extra risk – and ensuing cost – of foreclosure.

• PMI allows you to buy a home with a small down payment, and helps the lender re-sell your mortgage on the secondary market to an institutional investor.

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• Most states have regulations prohibiting lenders from making a loan in excess of 80% of the purchase price without PMI.

• PMI is paid in monthly installments, a year in advance; a year’s reserve is paid in full at closing. The premium depends upon the price of the home and the type of mortgage.

• You don’t necessarily have to pay PMI premiums for the life of the loan. After you’ve accumulated 20% equity in your house, you can usually cancel your PMI premiums (whereupon you’ll get your year’s reserve back). Always make sure, however, that you get a cancellation policy in writing.

• The company that purchased your mortgage on the secondary market will be the one who decides if and when PMI can be cancelled, and they usually provide a specific set of rules.

• Most lenders will look at the following:

• An appraisal – the lender will want to see that the home’s value has appreciated enough to give you the 20% equity you need to cancel PMI.

• Payment history – lenders will want to see a clean payment record for the previous year or two.

• Length of ownership – most lenders will make you wait at least two years before you can cancel PMI, to develop a track record of on-time payments.

• Many buyers ask their lenders for a document stating that their PMI payments will stop automatically when their equity reaches 20%. The most important thing for you to know is that it’s up to you to contact the lender and make sure any agreement is clearly spelled out.

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