Private Mortgage Insurance, or PMI as it is commonly called by homeowners, is a special insurance that is required by lenders when borrowers’ loans are valued at more than 80% of the home’s value. If the new homeowners cannot afford to put down more than 20% on their new home, they are required to pay the PMI. A big part of the reasoning behind PMI is to protect the lender should the new homeowners default on their payments.
A big consumer benefit of PMI is that it allows people to buy better homes despite their current available funding for a down payment. Sometimes buyers can purchase a home with as little as three to five percent down.
The Homeowner’s Protection Act (HPA) of 1998 requires that lenders remove the PMI insurance at the request of the buyers as soon as they have paid down their home to within 80% of the value with good payment history. When a loan reaches 78% of the balance owed, lenders are required to automatically terminate the PMI. In terms of high-risk loans, lenders must automatically terminate the PMI once the balance hits 77%. Also through this act, lenders are required to provide certain disclosures and information to their consumers.
Remember, while PMI can help you get a better house with a smaller down payment, you are still the one paying in the end. PMI is designed to help the lender, not the buyer. Be vigilant, use it if you must, but do your best to pay down your home’s mortgage so you can remove the PMI from your account.