What is Private Mortgage Insurance (PMI)?
Mortgage applicants will come across to this term at some stage. A figure may be quoted under this heading in the costs. They may think that this insurance provides some sort of benefit to them directly or confuse it with any other insurance.
Private Mortgage Insurance (PMI) is extra insurance that mortgage lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.
PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have access to homeownership. With this type of insurance, mortgage applicants can qualify for a loan to buy a home with as little as 5 percent down payment. This means that people can buy a home sooner without waiting years to accumulate a large down payment.
A home buyer or a home owner who refinance the existing mortgage can avoid to pay PMI by coming up with 20% down payment or not refinancing more than 80% of the value of a property. This will save considerable amount every year.
PMI is a protection for the mortgage lender. It does not cover anything else. Home owners should not confuse PMI with any other cover. It does not pay monthly mortgage payments for the home owner in case something happens to them or it does not cover home for any damages. These are separate insurances.
The Home Owner’s Protection Act allows the home owner to request the lender to cancel the PMI should they pay down the mortgage below 80%. It also requires the lender to cancel the PMI automatically when the loan amount falls below 78%. The home owner should not be delinquent at the time of request or automatic cancellation.
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