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Understanding Private Mortgage Insurance

By Mary Lamphere

If you don't put more than 20% of the appraised value or sale price down when your purchase your home, your lender will most likely require you to secure mortgage insurance. This insurance policy is separate from homeowners insurance and basically just protects your lender in the case that you should default on payments. Private mortgage insurance is an added cost on your end as you will be the one responsible for paying for the insurance but the lender will be the beneficiary.

Private mortgage insurance is most well known as PMI. Fees can vary depending on the actual size of the down payment compared to the total appraised value or sale price of the home. Most of the time, private mortgage insurance will cost somewhere around 1% of the original amount of the loan each year. The rates could be as low as .3 percent but they could be higher than 1%. Again, this all depends on the down payment and the insuring corporation.

How Can I Get Out of Paying PMI?

Most of the time, the biggest question that borrowers have is "How can I not be responsible for paying PMI?" The good thing is, you typically don't have to pay PMI once the loan-to-value ratio hits 80%. What this means is that as soon as you have paid enough mortgage payments to have a full 20% equity in the property that you are purchasing then you can request that the lender discontinue PMI premiums.

Wondering How Long It Will Take to Reach 80% Loan-to-Value Ratio?

Federal law requires lenders to keep you informed of the number of years and months that it will take for your loan-to-value ratio to hit 80%. This information should be provided to you at closing. Keep in mind that as long as you make your minimum monthly mortgage payments on time, your loan-to-value ratio will hit the 80% in the specified amount of time that your lender discloses to you in closing.

If you decide to make additional payments or you can double up payments even just once or twice a year, you could drop months or even a year or more off the amount of time that you have to pay for PMI. Even just a few extra house payments made per year can dramatically reduce the length of your loan, provide greater equity in the property and help you to save money by being able to drop PMI payments from the total cost of your monthly mortgage that much sooner.

Paying PMI premiums can be tough, if you know that you cannot afford or will have trouble paying the PMI premiums each month, you may want to consider putting more money down or choosing a home with a higher appraisal and lower sale price. Lenders will want PMI if there is not 20% equity in the home going into the loan so as a home buyer, you will have to either put money down to satisfy this equity, purchase a home that is for sale at a low enough price to provide you with this immediate equity or pay for private mortgage insurance until these terms are satisfied.

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