What is PMI and Do I Need It?
Private Mortgage Insurance or PMI is an insurance policy that protects the lender in the event of mortgage default. The buyer pays the premiums and the lender is the beneficiary. If you get mortgage financing through the Federal Housing Administration, the resulting FHA loan has this type of insurance policy built into the mortgage payments. Non-Government lenders typically purchase a PMI policy by paying 12 months of premiums up front and the amount they paid plus fees is included in the closing costs or they may just ask you to write them a check.
Then the yearly premium amount is divided into 12 monthly payments and that amount is included in your monthly mortgage payment. The amount of the monthly PMI part of your mortgage payment is put into an escrow account for the lender to withdraw from when your next yearly premium is due.
Do I Need PMI?
The only way to avoid paying PMI is to have at least 20% equity in the home at the time of closing. Equity is the difference between the value of the property and the loan amount on the property. Let’s assume you are purchasing a home at near market value. If you pay a 20% down payment, you will most likely avoid having to pay these premiums. Any down payment below 20% will require an insurance policy.
If you are buying a REO, short sale or foreclosure property, it is possible that you won’t have to pay PMI premiums. If the purchase price is 20% less than the property value, you may be able to negotiate a mortgage that doesn’t require it. If you don’t have a down payment when you buy a REO, short sale or foreclosure property, the lender may require a short-term policy for 5 years, as an example.
How Much Does PMI Cost?
PMI is very inexpensive, but the amount is based on the size of your down payment. The cost is typically between 0.3 percent and 1.15 percent of the original loan amount per year. The payments are tax deductible through 2013, but Congress may extend it.
Do I Need to Have PMI for the Entire Length of My Mortgage?
No, not unless you agreed to it and signed a paper stating such during closing. Not all lenders will mention the PMI, so make sure you know what you are signing and you are clear on what is included in your monthly mortgage payments.
Can I have PMI stopped?
Yes, whenever you have at least 20% equity in your home, have met the agreed upon terms of the PMI or you did not sign up to have it for the length of the loan, you can request to have the policy closed.
If your PMI is equity-based, you will most likely be required to provide proof that you have at least 20% equity in the home by paying to have your home appraised. If you agreed to a 5-year PMI, for example, you can request to have the policy dropped at the end of that 5-year term. If you have made every mortgage payment on time, you shouldn’t have a problem with getting the lender to agree to drop the PMI policy.