What is Private Mortgage Insurance (PMI)?
Lenders typically require borrowers to have at least a 20% equity position1 on conventional loans. Private mortgage insurance (PMI) allows borrowers to have a reduced down payment or lower equity in the property being financed. If you do not have 20% in equity or down payment, the lender will require private mortgage insurance (PMI).
PMI insurance is paid by the borrower. The payment is included in the regular house payment.
Advantages of PMI:
A second advantage is that you may purchase a larger home with a lower down payment. You can purchase a home with as little as 5% down using PMI. With $10,000 you could make a 5% down payment on a $200,000 home or put 20% down on a $50,000 home2.
Additionally, you may be able to purchase a home sooner. If you are finding it difficult to save for a down payment faster than the increase in housing prices, PMI will enable you to stretch the money you have saved by allowing a smaller down payment.
Disadvantages of PMI:
Alternatives to PMI:
(1) value is determined
using the lesser of the purchase price or appraised value
PMI can be removed from a loan under certain circumstances:Situation 1
PMI may be canceled at the borrower’s request if:
Write to the current loan servicer requesting that the PMI be cancelled. The loan servicer must act on the request within 30 days of receipt of the request.Situation 2
PMI may be cancelled due to home appreciation and the build-up of equity. This may be an option if:
The best approach in this situation is to contact the current loan servicer and request the specific guidelines to cancel PMI.Situation 3
The loan servicer will automatically cancel PMI unless the loan has been classified as a high-risk loan if:
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