What is Private Mortgage Insurance?

One of the biggest hurdles potential homebuyers face is saving enough for the down payment and closing costs associated with buying a home. One misconception out there is the thought that you need at least 20 percent down to purchase a home. While that’s no longer the case some loan programs require as low as three percent for a down payment, it’s important to note that homes purchased with less than 20 percent down often require the borrower to pay Private Mortgage Insurance or PMI. But what exactly is PMI? Below, we’ll take a look at some of the basics.

What is PMI?

PMI is a type of mortgage insurance that is typically required on mortgage loans for borrowers who pay less than 20 percent for the down payment of a home. PMI protects the lender in the case that a borrower defaults on their mortgage. There are some cases that PMI is not required, such as a VA loan, but in most cases, PMI is a requirement and is arranged by your lender.

When is PMI Paid?

PMI is typically included with your mortgage principal, taxes and insurance. This can be either as part of your monthly mortgage payment, which is a part of your mortgage escrow, or as a lump sum once a year.

Can I Get Rid of PMI?

PMI automatically falls off when you reach your automatic termination date, which is when the loan is scheduled to reach 78 percent Loan to Value (LTV). That date will be on your PMI disclosures form at closing and will be handled by your mortgage servicer. You may request early PMI cancelation when your loan balance reaches 80 percent of the home’s value or you may be eligible to request an appraisal to determine that your home’s value has increased.

Refinance to Get rid of PMI

If you are planning to refinance your current mortgage to take advantage of today’s lower interest rates, you may also be able to remove PMI. If your new mortgage is at least 80 percent of the current value of your home, PMI will be eliminated from your new mortgage. Depending on your existing mortgage, this may occur by comparing your remaining loan balance against a newer appraisal value. Refinancing your existing loan may also allow you to lower your current monthly mortgage payment amount, get access to cash to pay off high-interest debt and other expenses, shorten the term of your loan and more.

Contact your local credit union to review your current mortgage with you and confirm if refinancing is a viable option for you.

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