What is PMI?  

Navigating the home-buying process can be akin to traveling in a foreign country where one isn’t familiar with the language.  There is a lot of vocabulary that isn’t familiar to non-real estate professionals.  One such term is PMI.  PMI, or private mortgage insurance, is insurance for lenders.  Homebuyers who have at least 20% of the sales price as their down payment on their new home must pay PMI.  Lenders require PMI in these situations because they’re assuming more risk when they are investing more in the home than you are.

The actual rate and monthly cost of PMI varies from homebuyer to homebuyer.  The rate and cost depend on several factors such as the value of your new home, the type of loan you’re signing and your credit score.  

The good news is that if you make timely payments on your mortgage every month, your PMI will disappear when you reach 20% of the equity of your home.  This varies from lender to lender, however, as some lenders will stop PIM when you reach a 78% loan-to-value ratio.   While this ratio may occur naturally as you make payments, it may also increase due to your home’s value increasing.

If this is the case, you can request that the lender remove your PMI payment.  This typically occurs when you present the lender with an independent appraisal to prove your home’s value has appreciated to the 78% loan-to-value ratio.  This is at the discretion of the lender, however.  Be sure to ask what your particular lender’s policies are in this regard, before you sign the loan documents.

Another way to remove the PMI is by refinancing your home loan.  For example, if there is a reduction in mortgage rates and you decide to refinance, you may also be able to ask your lender to remove the PMI.  Finally, there are “no PMI” loan programs out there.  However, these programs typically feature a higher interest rate or higher fees in lieu of the monthly PMI amount.  Be sure you have all of the information, regardless of the type of loan.

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