Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is a type of insurance that lenders require borrowers to pay when they have a conventional loan and make a down payment of less than 20% of the home’s purchase price.   PMI protects the lender in case the borrower defaults on the loan and the lender is unable to recover its investment through foreclosure and sale of the property.

Here are some key points about Private Mortgage Insurance (PMI):

1. Requirement: PMI is typically required by lenders when the borrower’s down payment is less than 20% of the home’s purchase price.   It allows borrowers to obtain a mortgage with a lower down payment but adds an additional cost to the monthly mortgage payment.

2. Cost: The cost of PMI varies depending on factors such as the loan amount, down payment amount, credit score, and loan-to-value (LTV) ratio.   PMI premiums are often calculated as a percentage of the loan amount and added to the borrower’s monthly mortgage payment.

3. Cancellation: Borrowers can request cancellation of PMI once they reach a certain level of equity in the home, typically when the loan balance falls below 80% of the home’s original appraised value or current market value.   However, some lenders may have additional requirements or restrictions for PMI cancellation.

4. Payment: PMI payments are made monthly as part of the borrower’s mortgage payment.   The exact amount of PMI depends on the loan terms and the size of the down payment.

5. Duration: PMI is usually required until the borrower reaches a certain level of equity in the home or the loan-to-value ratio falls below a specific threshold.   Once the loan-to-value ratio reaches 78-80%, PMI is typically automatically canceled.

6. Tax Deductibility: PMI premiums may be tax-deductible for eligible borrowers, subject to certain limitations and income thresholds.   Borrowers should consult with a tax advisor or accountant to determine their eligibility for PMI tax deductions.

Overall, PMI allows borrowers to purchase a home with a smaller down payment, but it’s important to understand the costs and requirements associated with PMI before committing to a mortgage loan.   Borrowers should compare loan options, including the cost of PMI, to determine the best financing option for their individual circumstances.