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Understanding The Basics of Private Mortgage Insurance (PMI)

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Private Mortgage Insurance (PMI) is a type of mortgage insurance which you may be obliged to cater for if you have a conventional loan.  It’s designed to safeguard lenders against any monetary loss in case you fail to pay your loan.

What Is Private Mortgage Insurance?

It’s clear that the more money you invest in a home, the lower level of risks you are exposed. Putting a substantial amount in your home lowers the chances of you walking away from your loan pretty much because of the fear to lose all the money and your home. However, the lesser you invest in your property financially, the more you are exposed to higher risks. Lenders will want to minimize risks and therefore, may want a 20 percent substantial down payment or indemnity that will disburse them the principal amount in case they close out.

PMI is organized by the lender and provided exclusively by private insurance companies. This mortgage is typically necessary when you have a conventional loan. You will also have to make a down payment of less than 20% of the total cost you used to purchase the home. Private mortgage insurance can also be needed if you are refinancing with a conventional loan and your equity is lower than 20% of your home’s value.

Payments regarding PMI are made monthly; however, in some circumstances there exist an option to pay a large upfront. The amount to be paid will depend on the down payments already on the home and the borrower’s credit score which is mostly between 0.3% and 1.5% of the original loan per annum.

PMI is an insurance that benefits lenders and not you as the buyer, only that it gives you an opportunity to buy a house while investing in less down payment. However, let us not confuse PMI with homeowners insurance which mortgage lenders will require too. The difference is that homeowner insurance takes care of damage or total destruction of the physical construction of the home.

How to get rid of PMI 

For you to successfully get rid of PMI from being part of your mortgage, there are four main tactics to do it. This includes:

Let automatic termination kick in

It’s a requirement that when your principal balance falls to 78 percent, your lender must cancel on that same date. Just in the same way, the PMI is required to be canceled at the halfway point of your mortgage.

Request PMI cancellation

Request PMI cancellation immediately the value of your mortgage decreases to 80 percent or even less than the original purchase price. Apart from being up-to-date with the payments, you must also be in a position to provide proof that the value has never depreciated from the time the property was acquired.

Refinance the existing mortgage

Refinance the existing mortgage at a period when you have at least 20 percent equity in your property.

Sell your home and pay off the mortgage

Getting rid of PMI becomes easier when the value of your home has increased compared to when you bought it.

Additional Tips

It’s important to note that PMI costs can add up quickly. Make sure you know where the equity in your home stands if you have already started making the payments. You can then make a cancellation request immediately once the 20% mark is reached.

Any payments you make should be specifically done when you really have to.

Before getting a loan, analyze all available choices with your lender and find out more about the conditions that apply to PMI to ensure that you choose the right loan option. Contact
Rocky Mountain Credit Union today for more information.

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