PMI : What is private mortgage insurance ?

PMI stands for Private Mortgage Insurance and is required by lenders when the borrower puts less than 20% of the principal as down payemtn. Simply put, PMI is the insurance you are buying to help your lender recoup their full investmnet in case you default. PMI only benefits the lender and not the borrower in all cases.

The biggest gotcha to be aware of is the fact that the lender doesnt automatically cancel the PMI even if your LTV ( Loan to Value ) falls below 80%. New laws now require lenders to stop this at 75% LTV, but thats 5% way past the LTV required. So watch out.

PMI is calculated as a stairstep function. The percentage of insurance paid by the borrower is incremented in steps for every 5% of increase in down payment. This 5% steps should be leveraged by borrowers in bringing this cost down if possible.

Some ways to avoid PMI include the ability to get a Second Mortgage. Second mortgage doesnt count towards LTV so when a borrower applies for 80% First Mortgage, 10% Second Mortgage, 10% downpayment to avoid the PMI. Also if you have been paying PMI for a while in the US market, its time to get your house appraised. Your house may have appreciated above the 80% LTV threshold.

What is PMI?

Private mortgage insurance also known, as PMI, is an insurance tool designed in the year 1957 to protect the moneylenders. It has to be taken by new homeowners, more so if the down payment by the owner is 20 percent or even less than that of the property's sale price or the valued price.

Why should one go for PMI?

The main reason for private mortgage insurance is to protect the lenders (you read it right not the homeowners) in case the new homeowner becomes a defaulter of their home loan. Additionally PMI is a must for all "zero money down" home loan borrowers and those who decline the purchase of private mortgage insurance cannot quality for the mortgage.

Advantages of PMI

The money paid for mortgage insurance cannot be written off, but the Federal Government is considering a program that would make premiums on both private and government insurance a tax deduction for those coming under the $100,000 per capita income bracket at least for 2007.

Additionally, if the borrower wants to go through a refinance process before 15 years of the loan, he gets a refund for the unused premium. The longer is the loan held, the lower would be the refund. In case the borrower gives back the loan in about 5 years, he would be getting somewhere between 33-50 percent rebate.

Another plus is that if the borrower's equity has reached a certain level, he can cancel the PMI.

Disadvantages of PMI

Since PMI is designed to favor the lenders, a homeowner will not like to purchase PMI. There are some ways to get rid off this hassle. The home loan seekers should be ready with a down payment and do inquire on piggyback loan (the borrower can receive two loans for the purchase price).

Another way is by doing home renovations and improving the value of the property. Once value of property is appreciated by about 20%, the moneylender will bring down the PMI charges, although he takes some time to verify and reassess if the property value has risen or not.

There is another way too, if the borrower is ready to pay higher interest rate there are some lenders who waive off the PMI.