Private Mortgage Insurance
Private Mortgage Insurance is designed to protect the Mortgage Lender in case the borrower defaults on the loan. It provides protection in the event of a foreclosure of the property in which the Lender had financed more than 80% of the home’s value.
In the event the borrower has defaulted on the loan, the PMI company will pay the Mortgage Lender. Usually the PMI company will compensate the lender the difference between your down payment and 20 percent of your home’s purchase price. Mortgage Lenders generally require PMI when the down payment is less than 20% of the appraised value, but this will depend on the loan program and the Lender. This allows the borrower to make a smaller down payment and still qualify for the loan. Without PMI, high loan to value mortgages wouldn’t exist. The loan to value ratio is determined by the amount of the mortgage loan divided by the appraised value of the home.
How much will I be paying?
PMI typically has an annual premium of half of one percent of the loan price per year. The premium payment is usually rolled into the monthly mortgage payment. The cost of PMI can vary- the lower the down payment and or credit score the higher the premium. Premium ranges anywhere from $30-$70 per $100,000 borrowed. You can request its removal once the mortgage is at 80% of the home’s value, but often times the Le
nder may require a history of on making payments on time, have established that the property value hasn’t declined with a new appraisal, and there is no subordinate lien (such as a HELOC) on the property. PMI should be set up to automatically drop when you reach 78% loan to value But a Lender is not required to remove the PMI if you have late payments or if the loan to value between a 1st and 2nd mortgage is more than 80%.