What is PMI (Private Mortgage Insurance)?
Private mortgage insurance, or PMI, has been around in some form for decades.
Back in the late 1950s, the first private mortgage insurance policy was introduced, giving a boost to the real estate industry. Prior to the introduction of PMI, buyers wanting a conventional mortgage would have to come to the closing table with a down payment of 20% of more. This kept many on the sidelines.
Today however, PMI is a common option for those using a conventional mortgage along with a low down payment.
Why Is PMI Required?
PMI over the years has at times gotten a bad rap, but once the policy is explained and why it’s used, it’s really an excellent option. It is in fact an insurance policy that the buyers pay for with the benefit or compensation going to the lender should the loan every go into default.
PMI compensated the lender the difference between the actual down payment and 80% of the loan amount. For example, if the sales price is $300,000 and the buyers make a 10% down payment, the policy would guarantee to remaining 10% of $300,000, or $30,000.
Who Pays For PMI and For How Long?
Most PMI policies today are paid by the borrowers in monthly installments. But the PMI policy isn’t a “forever” thing.
Regulations require any PMI policy to drop when the loan naturally amortizes down to 78% of the current value of the property or if the owners decide to pay the outstanding loan balance down to 80% of the value.
If for example, the owners think their property has appreciated over the past five years, they can contact the lender and request the policy be removed. The lender will then review the request and order an appraisal to see if in fact, the loan balance is at or below the 80% level.
We have many low PMI options for borrowers that do not have 20% down. Contact us for more information!