What is PMI, and how can I avoid paying it?
A. PMI is insurance for the benefit of the lender. If a property is abandoned or goes into foreclosure, this policy protects some of the value of the home. This policy is usually required if the loan-to-value (LTV) is greater than 80 percent. LTV means the percentage relationship between the amount of the loan and the appraised value or sales price – whichever is lower. There are many exceptions. There are loans for 100 percent of the purchase price that do not require PMI, and some loans at 75 percent LTV that do require PMI. FHA and other first-time homebuyer programs require mortgage insurance, regardless of LTV. • If you provide less than 20 percent down payment, or obtain an FHA loan, mortgage insurance will typically be required. The lender takes care of obtaining the mortgage insurance, but it will be part of your normal monthly payment.
Private Mortgage Insurance (PMI) is an insurance policy provided by private-mortgage insurance companies that protects the lender against loss in the event the borrower defaults on the loan. A borrower is normally required to pay PMI when his or her loan amount is greater than 80% of the value of the house. Once the equity you have in your house reaches 20% or more, you may contact your lender to request cancellation of PMI. In most cases, this will require an appraisal, which you may be required to pay for. You can also obtain a second mortgage or Home Equity Line of Credit to reduce your loan-to-value to 80%.
