What Is PMI? How Do I Get Rid Of It?

PMI is Private Mortgage Insurance and it is required when you buy a house or refinance a house when the loan amount is greater than 80% of the sales price or appraised value.  PMI is an insurance policy the borrower pays for to protect the lender against the costs of foreclosure and losses that may occur if they do not sell the home for the balance of the loan.  This insurance is provided by a private mortgage insurance company.  In effect, the borrower receives no benefit for the money they pay for premiums.

 

The cost of PMI increases with a lower down payment.  For a loan that is 80.01% to 85%, you will generally pay .0032% of the loan amount as an annual payment, for 85.01% to 90%, you will generally pay .0052%, for 90.01% to 95%, you will generally pay .0078, and for 95.01 to 100%, the rate can range from .0092% to .012%. 

 

When you find yourself in a loan to value greater than 80%, always ask the lender or mortgage broker about splitting the loan.  A 90% loan to value can be an 80% first mortgage and 10% second mortgage.  Most of the time, your payment will be lower but more importantly, your entire payment will benefit you in the form of an interest write off and/or principal reduction.

 

Should you have PMI, it can be cancelled when certain factors occur.  Most lenders require a minimum of 2 years of PMI payments.  After that, if the loan balance is less than 80% of the current appraised value, you can request elimination of the PMI payment.  In most cases, you will have to pay for an appraisal.  Call the lender and ask for an acceptable appraiser in your area.  This is to make sure you hire an appraiser that the lender accepts. 

 

Another way to eliminate PMI payments is to refinance.  If you know the value has gone up enough and you have a reason to refinance, such as lower rates, debt consolidation; then refinance.  Just make sure the new loan amount will be 80% or lower of the appraised value.

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