What does Private Mortgage Insurance do for me when I buy a house?
Private Mortgage Insurance (PMI) is required when a homebuyer makes a down payment under 20 percent. It actually protects the lender, not the homebuyer, from losing money if a homeowner defaults on a mortgage.
However, in some situations, PMI is helpful to the buyer, too.
In some cases, a buyer might want to keep some of their cash for expenses after the sale. In this case, they could put down a lower down payment and keep some cash.
In other cases, a homebuyer could opt for a slightly more expensive home, even though they won't have 20 percent as a downpayment. Instead, they would pay PMI.
In either situation, much will depend on the home you are buying, the loan-to-value ratio, and your credit score.
PMI is calculated as a percentage of your loan amount. It ranges from .58 percent to about 1.86 percent. The higher your loan, the more private mortgage insurance you will pay. That cost could be as low as $35 or more than $100 a month.
A homeowner only has to pay PMI until they get 20 percent equity in the home. After that, the lender is required to cancel the PMI. You gain equity in your home by making payments consistently until you have more than 20 percent of equity built up.
Another thing you can do is have your home reappraised if you think it has gone up in value. You can contact your lender about the reappraisal and if your home has gone up in value, you can have PMI cancelled. However, you will have to pay for the appraisal.
