PMI or Private Mortgage Insurance is
normally required when you buy a house with less than 20% down.
Mortgage insurance is a type of guarantee that helps protect lenders
against the costs of foreclosure. This insurance protection is
provided by private mortgage-insurance companies. It enables lenders
to accept lower down payments than they would normally accept. In
effect, mortgage insurance provides what the equity of a higher down
payment would provide to cover a lender's losses in the unfortunate
event of foreclosure. Therefore, without mortgage insurance, you might
not be able to buy a home without a 20% down payment.
The cost of PMI increases as your down
payment decreases. Example: The cost of PMI on a 10% down payment is
less than the cost of PMI on a 5% down payment. Your PMI premium is
normally added to your monthly mortgage payment.
The decision on when to cancel the
private insurance coverage does not depend solely on the degree of
your equity in the home. The final say on terminating a private
mortgage-insurance policy is reserved jointly for the lender and any
investor who may have purchased an interest in the mortgage. However,
in most cases, the lender will allow cancellation of mortgage.
