Private Mortgage Insurance

Private mortgage insurance (PMI) is mortgage insurance provided by a private mortgage insurance company (as opposed to a government agency or affiliate) to protect lenders against loss if a borrower defaults. 

Most lenders require mortgage insurance for loans with a loan-to-value ratio above 80 percent. PMI can often be paid in one lump some, but is usually paid monthly. When the LTV gets below 80%, mortgage insurance can generally be terminated.

How is PMI calculated?

The private mortgage insurance annual premium is usually calculated as a percentage of the total loan amount. The premium percentage increases in increments as the loan-to-value (LTV) ratio exceeds 80 percent. In other words: As the LTV increases, the lender must assume more risk, and the premium rises.

A good estimate of premiums:

How do I get rid of PMI?

When you have at least 20% equity in your home. This can be either through appreciation of your house or paydown of the loan. Example, your home appreciates by 20% the first year you buy it, you now have 20% equity in the home (actually more but we won't get into that). You now can now refinance or petition your existing lender to have it removed.

As of July 1, 1999 new federal legislation provides for the following PMI reforms:

1) Automatic termination of PMI will occur for most borrowers when their loan balance has been amortized down to 78% of the original property value.
2) Borrowers with good payment records will be able to request cancellation of PMI when their principal balance has been paid down to 80% of the original property value of the house. Borrowers may be able to demonstrate their 20% equity by submitting a current appraisal at their own cost.
3) Some borrowers, whose loans are deemed "high risk" may not be able to get rid of PMI payments until midway through the loan's life; 15 years for a 30-year loan, for example.
4) Federal Housing Administration (FHA) mortgage insurance is not affected by the new law.
5) Lenders must make borrowers aware of these new rights on a regular basis.

Important: Do not confuse mortgage insurance with mortgage life insurance. Mortgage life insurance is an optional life insurance policy that pays off your mortgage in the event of your death. It can be purchased from your lender or your insurance agent.