Do You Need Private Mortgage Insurance When Buying a Home?

Private mortgage insurance, commonly referred to as PMI, is something you need to know about when you buy a home. If you’re making a down payment of less than twenty percent, your bank or mortgage house will most likely require it. When you’re calculating what your monthly cost will be, it’s just as important to figure in the cost of this insurance as well as the taxes and homeowner’s insurance.

The purpose is to reassure the lender that they will get their money if you default on your loan. Specifically, your PMI insurance helps the lender with resale costs in the event that you foreclose. The insurance must remain in effect until at least twenty percent of the loan is paid off. That is estimated to provide a fair basis to determine whether or not you are going to default.

The cost of PMI can vary from lender to lender. It runs approximately $55 per month for every $100,000 borrowed. When you’re shopping for a mortgage, ask about the PMI policy and cost. Otherwise you’ll be taken aback at the time of purchase when it’s tacked on to your monthly payment.

PMI is almost always calculated based on the amount of your loan divided by the value of your home. To use round figures, if you borrow $90,000 to buy a $100,000 home, you have a 90% LTV (loan to value) ratio. Your ratio needs to drop below 80% before you can discontinue the insurance.

In the past, some homeowners managed the PMI by piggybacking a second mortgage to cover this cost. A couple years ago, tax laws made the cost of private mortgage insurance tax deductible, so it is more financially beneficial if you avoid the second mortgage, pay the insurance, and take the deduction. The law currently in effect is up for revision or renewal in January 2010.

So, once you’ve paid off a minimum of twenty percent of your home’s value, how do you get the PMI discontinued? Some lenders stipulate that you must pay off twenty percent of the mortgage, and some say that you must own twenty percent equity in your property, so check to see how your contract is worded.

Besides reducing the size of the loan owed, you also have to establish a good payment history. Most lenders require that you have not paid your mortgage thirty days late in the past year, nor sixty days late for at least two years. They can also require you to prove that your property value has not declined.

Years ago, homeowners were unaware when they were eligible to discontinue their PMI and often continued paying it unnecessarily for years. Today’s laws require the lender to let you know when reach 78% of the required level of equity or loan satisfaction. In fact, if there is undue delay in canceling your PMI, the lender must repay your premiums to you.

When you make your mortgage loan, your lender is required to notify you the approximate date when you will become eligible to discontinue the PMI. If you have an adjustable rate mortgage, this is supposed to be calculated based on the rate in effect at the time of the loan. However, you are well advised to stay on top of things so that you know when you are eligible to discontinue it, and take the initiative to contact your lender.