Thursday, March 09, 2006

What is PMI?

Private Mortgage Insurance (PMI) is insurance that home buyers are typically required to buy if their down payment is less than 20%. This insurance protects the lender if the borrower fails to repay the loan.

Many years ago the only way to get a mortgage was to first have a 20% down payment. PMI changed the rules and enabled buyers to purchase with very little down payment. That is the only benefit PMI is to a buyer, PMI protects the lender and should not be confused with Homeowners Insurance or Mortgage Life Insurance. Homeowners and Mortgage Life Insurance both protect the buyer in the case of a problem. PMI only protects the lender.

PMI can cost as much as $1500 per year on a $200,000 home which adds $125 to each monthly payment. You will pay this extra until the PMI is cancelled. You have the right to request the cancellation when the loan you have is less than 80% of the value of the home based on a new appraisal. You must provide a new appraisal that is less than three months old and have a good repayment record. You must request the cancellation and the lender can or not cancel the insurance based on the information. By law the lender must cancel the PMI when your loan is less than 78% of the original loan amount.

Combination loans have become the popular alternative to PMI. You can borrow up to 100% of the money in the combination of a 80% first and a 20% second mortgage. By borrowing a first and second combination (80/20, 80/15/5, 80/10/10, and many others) you avoid the PMI and although the interest rate may be a little higher ultimately the monthly payment is smaller.

Joe King - Loan Originator
The Mortgage Company Inc.
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