What Is Private Mortgage Insurance (PMI)?§
Private Mortgage Insurance (PMI) is a type of insurance policy designed to protect mortgage lenders from the risk of borrower default. Offered by private insurance companies, PMI is typically required for homebuyers who are unable to put down at least 20% of the home’s purchase price as a down payment.
With less than the conventional 20% down payment, borrowers indirectly mitigate the lender’s risk by agreeing to obtain PMI. This insurance makes it possible for homebuyers to qualify for a mortgage with a smaller, more manageable down payment, enabling them to secure their dream home sooner.
Costs Associated with Private Mortgage Insurance§
Borrowers required to carry PMI often pay approximately 0.5% of the total borrowed loan amount annually. However, PMI premiums are generally not tax deductible, adding a notable expense to the overall cost of the mortgage. Understanding this cost is crucial for prospective homeowners as they budget for their purchase.
Removing Private Mortgage Insurance: A Cost-Saving Strategy§
One noteworthy advantage for borrowers with PMI is the possibility of cancellation. Once the borrower has paid down enough of the mortgage principal, typically achieving 20% equity in the home, they can request the removal of PMI. Verification and procedures for PMI cancellation will vary among lenders, but this milestone offers significant potential savings over the life of the loan.
Related Terms: mortgage lender, down payment, principal, home loan, insurance premium.
