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Private Mortgage Insurance
What is private mortgage insurance (PMI), and when is it required?
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1 Reply
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As a rule, purchasers who contribute a lower down payment than 20% are recommended to obtain PMI. PMI protects lenders from loan defaults, thereby insuring the loan. PMI can be useful as it encourages buyers to enter the housing market even with low starting amounts. Sometimes, PMI can be removed from a borrower’s record.
More details:
Basis: Without PMI, lenders require a large amount of money to be put down as collateral, around 20-30%. PMI enables lenders to put down a lower amount of collateral, such as 20%, without changing lenders’ rules.
How it looks: For borrowers, depending on the collateral’s value, PMI can range from .3% to 1.5%, which is added to the borrower’s mortgage payment. This all depends on the market he’s in and the value of the PMI itself.
Automatic cancellation: As a rule of thumb, once the loan is satisfied with the property’s original value at a maximum of 80% loan-to-value ratio, the lender is requested to cancel the PMI. This means it is automatically removed once the value is less than 78% of the original value.
Is it clear what a PMI is and when it will be required?