As you go through the home buying process for the first time, you will likely encounter terminology that is new to you. One of these terms is a common acronym, “PMI,” which stands for Private Mortgage Insurance. Note that the following information applies to conventional loans. There are other mortgage programs available that do not require PMI payments.
What Is PMI?
Private Mortgage Insurance is an insurance that is added onto a monthly mortgage payment. It protects the lender against loss if a borrower defaults on a loan, so that the lender will be able to recoup their investment. In other words, this insurance protects your lender in case you are unable to pay your mortgage.
Most lenders require PMI for homebuyers who obtain mortgages that are more than 80% of their new home’s value. In other words, buyers with less than a 20% down payment are required to pay PMI. This means that if you bought a house for $100,000 and had a down payment of less than $20,000, you will be required by the lender to carry PMI.
Benefits of PMI
PMI provides the protection lenders need to make loans to people with less cash on hand who are able to put only 10%, 5% or even 3.5% down. It has allowed many people to become homeowners much sooner than if they had to wait years to save the traditional 20%. This allows them to start to build equity and enjoy the other benefits of homeownership.
Termination of PMI
You may be asking yourself, “How long will I be required to pay PMI on my mortgage?” A federal law—the Homeowners Protection Act of 1998—mandated that lenders end PMI at specific stages. First, the borrower can request that PMI can be cancelled once the mortgage had been paid down to the 80% level.
In addition, mortgage lenders or servicers must automatically cancel PMI coverage on most loans once the mortgage is paid down to 78% of the value. They also require that the borrower is current on their loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon as the loan becomes current.
Finally, if PMI has not been canceled or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year mortgage with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage.
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This information is provided to you courtesy of UW Credit Union, based in Madison, WI. UW Credit Union is a leading provider of home loans in Dane County and throughout Wisconsin.
For more information about the home loan process, please contact a UW Credit Union Home Loan Specialist at 800.533.6773, ext. 2810, or vist UWCU.org.