Mortgage Insurance

Mortgage Insurance

Private Mortgage Insurance (PMI) is often necessary if your conventional loan amount is higher than 80% of the home’s value or purchase price.  For example on a $200,000 home purchase a loan amount above $160,000 (80%) will bring up the issue of PMI.

What Is PMI?

PMI insures the lender in the event of a loan default.  The insurance covers a part of the loan.

Benefits of PMI

PMI helps by giving conventional lenders the confidence to accept smaller down payments because the lender shares some of the risk with the PMI company.  PMI is not life or disability insurance for the borrower.  It provides no direct benefits to the consumer.

There are different types of PMI and some options to avoid it.

PMI can be avoided by obtaining a loan for only 80% of the homes value and placing the additional 20% as a down payment.

PMI can be cancelled if the loan is paid as agreed and reaches the 80% level,  It should be cancelled automatically by the lender once the loan amount reaches 78% of the original value.  If you believe your home value has increased due to a favorable market, addition, etc. contact your servicer about cancelling PMI.  An appraisal may be needed be sure to order that through the servicer.  Most will not accept an appraisal that you ordered on your own.

Government Insured Loans

These loans do not have PMI but do have funding fees, guarantee fees, MIP, etc that perform the same role as PMI.  FHA insures part of the loan to the lender should the loan default – just like PMI.  But the rules for cancelling FHA mortgage insurance and different than rules for cancelling PMI.