What is PMI and why do I need it?

If your down payment on a home is less than 20 percent of the appraised value or sale price, your lender will require you to get private mortgage insurance (PMI). PMI is an insurance policy to offset losses in the case where you are not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.  As a borrower, you pay the premiums, and the lender is the beneficiary.

PMI fees vary, depending on the size of the down payment and the loan and your credit score, from around 0.3 percent to 1.15 percent of the original loan amount per year. Mortgage insurance premiums are tax-deductible through 2013, and it is possible that Congress could extend deductibility longer than that.

Example

Let's say you buy a $100,000 house and make a 10 percent down payment of $10,000, borrowing $90,000. The mortgage insurer charges an annual premium of 0.49 percent. The insurer multiplies the loan amount by 0.0049, for an annual premium of $441.00, which is divided into 12 monthly payments of $36.75.

Tip

Once you've made enough payments to boost your equity to 20 percent of the original purchase price, you can ask your lender to cancel PMI. By law, the lender must cancel private mortgage insurance at this point as long as you have a history of on-time payments, you can establish that the property value has not declined and there is not a subordinate lien, such as a home equity loan. Lenders must automatically cancel PMI when the balance hits 78 percent.

Some FHA loans require payment of mortgage insurance premiums for the life of the loan.

Call Conquest Real Estate to Learn More (248) 569-1486