Private mortgage insurance, or PMI, is a type of insurance that mortgage lenders sometimes require their borrowers to carry. In the event that a borrower defaults on their mortgage before the bank has collected much money in the form of mortgage payments, it’s likely that the bank will incur a loss during the process of foreclosing on the property.
PMI is intended to protect the lender financially by reimbursing them for the amount of the loan outstanding in the event of a foreclosure. For loans where PMI is required, the cost of insurance is borne by the borrower.
Lenders require PMI for some loans, while others are exempt. PMI can be avoided, however, by keeping a few things in mind.
Do I have to pay PMI?
PMI is required in certain situations, but with good financial planning it can be avoided. Generally, if you take out a mortgage with a down payment of less than 20% of the home’s value, the lender will require you to pay PMI.
The easiest way to avoid PMI is to simply wait to apply for a mortgage until you have saved up a sufficiently large down payment, so the lender will waive the PMI requirement. This may take longer than you want, but your patience will save you money.
If I’m already paying PMI, how can I stop?
Even if you’re already in a mortgage that requires you to pay PMI, it’s likely that you can eventually get out of paying it.
Over time, the mortgage payments you make will create equity in your home. Your home’s market value will fluctuate, too, which can help. The key threshold is when you have paid down the loan to an outstanding balance that is 80% or less of the home’s value.
You may need to have your home appraised again, and you may be on the hook for this expense. Once you show the lender that their outstanding risk is less than 80% of the home’s value, though, they should drop the PMI requirement.
Conclusion
Given how many people default on their mortgages, it’s reasonable that lenders require some protection when lending to higher-risk borrowers. You don’t have to be on the hook for this expense, though. By either preparing financially for your mortgage or reassessing things once you’ve built up some equity, you can avoid this expensive burden which really isn’t for your benefit at all.
References
https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/
http://www.ny-bankruptcy.com/services/foreclosure-solutions/foreclosure-defense/
https://www.daveramsey.com/blog/cancel-private-mortgage-insurance
