Many prospective homeowners are faced with many different requirements when trying to get approved for a home loan. One of the things that are required of many buyers is the purchase of private mortgage insurance or PMI. Some of the most common questions associated with PMI are, what is it; how much will it cost and is there a way around this requirement. PMI requirements vary by the type of loan you are trying to secure; the length of the loan and how big of a down payment you put down on the home. But if you have some knowledge about PMI you will be prepared for what to expect when the lender brings up the topic.
Mortgage insurance is protection for the lender, not for you. Lenders often require homebuyers to purchase mortgage insurance if they have only put 5 percent down on a home instead of the full 20 percent. The lender will require that you pay PMI premiums each month in addition to your monthly mortgage payment. If, for any reason you default on the loan, the insurance company agrees to payout the amount of the policy to cover the lender for its loss. Mortgage insurance isn’t designed to protect you from a loss; rather it is designed to protect the lender for any loss they suffer.
If you discover that mortgage insurance is required for the type of loan that you are interested in and the amount of down payment you have put down, some lenders may offer something referred to as “lender paid mortgage insurance.” This alternative simply means that the lender agrees to pay your mortgage insurance in exchange for you paying a slightly higher interest rate. When a lender covers the cost of PMI they often choose to make a one-time payment to the insurance company instead of monthly premiums.
In some cases you may be required to purchase PMI by your lender, but in time you may be allowed to drop it. This can be done if you keep paying your mortgage payments on time and have built up enough equity in your home. If you feel that you have reached that stage and have accumulated enough equity in your home, you should contact your lender to see if you can now drop your PMI. In many cases your lender will not call you to inform you that you have reached that point, it is up to you to monitor where you stand and contact your lender when you are sure you have enough equity in your home.