Private Mortgage Insurance
Private mortgage insurance (PMI) is something that
you, as a borrower, pay for, which is for the benefit
of the lender. It guarantees that if you default on
your loan, the lender will still be paid. It means you
have more to pay every month, but it may also mean the
difference between being accepted or denied.
Usually, unless you have spotless credit, you will
be required to purchase PMI if you are putting less
than 20 percent down on your property. Nobody likes
having to pay extra money, but without it, a banker,
even a subprime lender with flexible rules and a heart
of gold, will be much less likely to issue a loan.
It’s no guarantee, but your willingness to purchase
PMI will weigh heavily in the decision whether to grant
you a loan, if you have poor credit and/or a low down
You should, however, be able to find out ahead of time
approximately what your PMI premiums will be.
If a banker is unwilling to tell you this information,
you be in for a shock. Although it will usually not
exceed $100, in some rare cases it might be several
hundred, and if you don’t know that until you
get to the closing table, you’re going to be facing
some tough last-minute decisions.
The Homeowners Protection Act sets out guidelines for
when you can cancel your PMI policy. You may request
that it be terminated once you reach 20 percent equity,
and it must be terminated automatically when you reach
22 percent. The bank doesn’t have to cancel it
once you have reached those thresholds if you have not
been on time with your payments or have other liens
on the property. If the lender, instead of you, pays
the PMI, the Homeowners Protection Act does not apply.