Summer Knight
Summer Knight
805 886 1261805 886 1261

PMI Insurance – What is it?

  • Borrowers whose down payments were less than 20 percent of the value of the home likely were required by their lender to buy private mortgage insurance (PMI), a policy that protects any losses the lender might take if the borrower does not make loan payments.
  • And unfortunately, PMI isn’t cheap.  According to a mortgage consumer guide published by the U.S. Federal Reserve System, PMI could cost anywhere from $50 to $100 per month.
  • Fortunately, borrowers can get rid of PMI.  The first way, of course, is to put down 20 percent when the house is purchased.  If that is not feasible, there is still a possibility of removing the insurance.
  • According to the Federal Reserve, when borrowers make enough payments to gain 20 percent equity in the home (based on the original purchase price), the owner can send a written request to the lender to cancel the PMI.
  • The Federal Reserve adds that federal law required PMI payments to automatically stop once the home has reached 22 percent equity – again based on the original purchase price and with a clean payment record.  For certain loans defined as “high risk” by the lender, borrowers must wait until equity reaches 23 percent of the original purchase price.
  • If a borrower is unable to get the PMI removed using the previously mentioned tactics, the lender must cancel it once the borrower is halfway through the loan term, provided the borrower is current on payments.
  • The PMI cancellation rules do not apply to loans made by the Federal Housing Administration or Veterans Administration, which have their own requirements for removing the PMI.
  • It’s also important to know that PMI is different than LMPI, which stands for lender’s private mortgage insurance.  Some lenders buy LPMI and charge borrowers a higher interest rate to cover the expense.  According to the Federal Reserve, this type of insurance does not automatically cancel; instead, the borrower must refinance the home to possibly remove it.