Private Mortgage Insurance (PMI)



Private Mortgage Insurance (PMI)

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|What is PMI? | |

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| |Private Mortgage Insurance (PMI) is required on all loan transactions where the loan-to-value ratio is 80 percent or greater. |

| |(Some cash-out refinance transactions require PMI at 75% loan-to-value.) This means that if you bought your house for $100,000 |

| |and had a down payment of less than $20,000, you pay PMI. |

| |PMI insures the lender - not you - against your default on the loan. Because statistics show that borrowers who put down less |

| |than 20 percent are more likely to default on the loan, lenders require PMI so that they'll recoup their investment in case of |

| |default. Under normal circumstances, the lender would not make the loan, but they're willing to take the risk as long as you |

| |pay PMI. |

| |How do you get rid of PMI? |

| |When can you stop paying PMI? The lender cannot force you to keep the PMI once the loan-to-value has gone below 80 percent. |

| |However, your phone will not ring the moment you've paid the balance below the level requiring PMI. So what you want to do |

| |first is to take a look at your most recent mortgage statement and divide the remaining principal balance by the original |

| |purchase price of your home. If that number is below 80 percent, call the lender and find out their procedure for removing PMI.|

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| |If you haven't been paying on the loan for very long, you still may qualify for having PMI removed by virtue of appreciation. |

| |The lender probably will require a full appraisal, which will cost you approximately $300. But you will quickly recover this |

| |cost by not having to pay the PMI. After the cost is recovered, the amount you were spending on PMI goes in your pocket. You |

| |can pay a little extra each month toward the principal to reduce your loan balance and shorten the time you must pay PMI. |

| |How can you avoid paying PMI? |

| |There are ways of both avoiding PMI and achieving a smaller than 20 percent down payment. Many lenders offer a loan called an |

| |"80/10/10." Instead of one loan, you get two. You'll have a first mortgage of 80 percent of the home's value, a second mortgage|

| |of 10 percent of the home's value, and you'll make a 10 percent down payment. Some lenders may even offer an 80/15/5. This may |

| |seem bizarre, since you're still borrowing the same amount of money, but the lender in the "first position" is only on the hook|

| |for 80 percent, which is less of a risk than a higher amount. You get the small down payment and the tax-deductible interest. |

| |In addition, the total monthly payments are often smaller than one larger loan with PMI. |

| |The other way out is to get a loan that builds the PMI into the interest rate. In this case, you agree to pay a higher interest|

| |rate in exchange for the lender loaning you more money than they normally would. It can be a nice compromise, because the |

| |interest is still tax deductible and it's simpler than doing two loan transactions. The key here is comparison. Ask your loan |

| |agent run some numbers for you on an 80/10/10 and a loan with built-in PMI. Then see which one will cost less. |

| |Note that these principles apply only to conventional loans. FHA loans have a Mortgage Insurance Premium (MIP), which is |

| |required for the life of the loan. |

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