Private Mortgage Insurance / PMI

Private Mortgage Insurance / PMI Related Information:

Private mortgage insurance, also called PMI, is an insurance policy a home buyer takes out to protect the lender in the event that the borrower defaults and doesn’t pay back the loan. It is required if you borrow more than 75%-80% of the total amount of the mortgage needed to purchase the home. Some lenders may require it if the home you are buying is in a high risk area of a city or town. This type of insurance provides you with the opportunity of having to save up less money to have a down payment for a home. In fact, instead of having to pay up to 20% of the amount of the mortgage as a down payment, you could get away with paying as little as 3 – 5% of the total amount.

The private mortgage insurance is beneficial to both parties because the lending institution has the protection it needs regarding the possibility of getting back the money and you, the borrower, have more money to use for furniture or improvements to the home. You can use the extra money in whatever way you wish, even in investments.

With PMI you are protected by law because under the Homeowner’s Protection Act of 1988 lenders have to disclose all information regarding private mortgage insurance and you can cancel the insurance once you have paid off enough money that your unpaid balance is less than 80% of the original amount you borrowed. Even if the lender is paying the premiums in return for a higher rate of interest, you can request the lender to cancel the policy and give you a lower interest rate on your mortgage. This regulation came into effect because many homeowners were not made aware of their rights when they borrowed the money to purchase a home. Therefore they had no idea that they were allowed to cancel the premium or request the lender to do so.

There are exceptions to this law when it comes to what the lending industry terms “high risk loans”. It does not apply to mortgage loans given to veterans or those who qualify through federal housing initiatives. It does cover most other residential mortgage transactions that meet the following criteria:

• the mortgage must be retained by the borrower
• the home must be a single family dwelling
• the borrower must live in the home
• the reason for the mortgage must be to purchase a home or refinance an existing mortgage.

With most private mortgage insurance, the company, itself, will cancel the policy once your unpaid balance goes below 80% of the purchase price or the amount you borrowed. You really do have to watch your balance because if this doesn’t happen you will have to initiate the cancellation procedures yourself. If you have a refundable policy, you may be eligible to receive a refund from the time the balance was below the 80% mark, but if you have a non-refundable policy, you will not get any of your money back.

Everyone who has a mortgage receives an annual statement that gives the details of the year’s transactions. You have to watch the payments you have made and the balance remaining on your mortgage. If you pay extra each month on your mortgage payment to cover monthly premiums for the following year, you will be able to see at a glance if you can get some of this money back. You can use it to buy something new or make a one time payment to reduce your mortgage without paying a penalty. Just incase you didn’t know, most banks allow you to make a large payment on your mortgage once a year.