If you are on the verge of buying real estate, you’ve probably heard the term Private Mortgage Insurance. Mortgage professionals talk about it a great deal, but you may be asking, “What is it exactly? And why should I care?”
Private Mortgage Insurance Defined
PMI is required by lenders if the down payment of a purchase is less than 20 percent of the home’s value. It protects the lender if the borrower defaults on the loan.
It also makes the lender more apt to loan, even if the down payment is as low as 3%, because in the long run, the lender’s investment is protected.
You Pay For It
Unlike other types of insurance which you pay to protect your interest in an asset, you pay Private Mortgage Insurance to the mortgage company to protect its interest in your new real estate. (Note that PMI is not usually tax deductible. Check with a tax professional for details.)
Make It Go Away: PMI Can Be Terminated Once You’ve Paid Down Your Loan
Once you pay down your mortgage to the point where it hits the magical 80% of the original purchase price or appraised value, whichever is less, you can request cancellation of PMI. The Homeowners Protection Act requires that loans made after 1999 include notifications to the borrower when you arrive at this point in your payments. To make the request, you’ll need to call your lender to put the process in motion. There will typically be an appraisal ordered to verify you’re at the 80% threshold. This will be your expense, so make sure you’re really close to that number before having your lender order the appraisal. The cost for this can range from $200-500, but will be worth it in the long run. If you’re unsure, contact a Realtor for comps and a CMA to see where you are.
Your PMI payments must be automatically canceled once you pay down your loan to 78%. At closing, and on a yearly basis, you should receive information from your lender about when you can request cancellation.
Whether you’re ready to buy a home now or need more information before taking the next steps, we can help! Contact your trusted Realtor today.