Diana Garrett - If it can be done

What is Private Mortgage Insurance (PMI)?

PMI is additional insurance designed to protect the lender from people who default on their loans and have less than 20% equity in their property.
About 30% of home buyers can’t afford a 20% down payment. PMI, however, allows them buy a house years before they’d normally be able to afford it.
Mortgage brokers say that home buyers who make small down payments are likelier to default than those who put down the traditional 20%. Therefore, lenders require those buyers to purchase PMI to insure the lender against the extra risk – and ensuing cost – of foreclosure.
PMI allows you to buy a home with a small down payment, and helps the lender re-sell your mortgage on the secondary market to an institutional investor.
Most states have regulations prohibiting lenders from making a loan in excess of 80% of the purchase price without PMI.
PMI is paid in monthly installments, a year in advance; a year’s reserve is paid in full at closing. The premium depends upon the price of the home and the type of mortgage.
You don’t necessarily have to pay PMI premiums for the life of the loan. After you’ve accumulated 20% equity in your house, you can usually cancel your PMI premiums (whereupon you’ll get your year’s reserve back). Always make sure, however, that you get a cancellation policy in writing.
The company that purchased your mortgage on the secondary market will be the one who decides if and when PMI can be cancelled, and they usually provide a specific set of rules.
Most lenders will look at the following:

An appraisal – the lender will want to see that the home’s value has appreciated enough to give you the 20% equity you need to cancel PMI.
Payment history – lenders will want to see a clean payment record for the previous year or two.
Length of ownership – most lenders will make you wait at least two years before you can cancel PMI, to develop a track record of on-time payments.

Many buyers ask their lenders for a document stating that their PMI payments will stop automatically when their equity reaches 20%. The most important thing for you to know is that it’s up to you to contact the lender and make sure any agreement is clearly spelled out.