Get the answers of 5 frequently asked questions on PMI
You need to purchase a Private Mortgage Insurance when you take out a home loan that is more than 80% of the property value. It is commonly referred to as PMI. This mortgage loan insurance protects the lender against any default on the home loan. Read on to know the answers of some frequently asked questions on PMI.
1. What is the purpose of purchasing a PMI?
A borrower has to purchase a PMI when he/she is unable to make at least 20% down payment on a home. The purpose of purchasing this mortgage loan insurance is that the insurance company reimburses the mortgage lender (up to a certain amount) when the borrower defaults on loan repayment and the home value is not enough to pay back the outstanding loan amount through a foreclosure sale.
2.How much do you need to pay for a PMI?
The PMI charges usually depend upon the amount of your home loan and down payment. The insurance companies usually charge ½ of 1% of the amount that you actually borrow from your lender to buy a home. However, the insurance companies also take into account your credit score while deciding how much premium you need to pay for your PMI.
3. When can you cancel the Private Mortgage Insurance?
According to the Homeowner’s protection Act (HPA) of 1998, a homebuyer can request for PMI cancellation once he/she is able to build up 20% equity on the property. However, this is valid only on the loans that have been originated after 29th July, 1999. The PMI guidelines vary on the loans that were originated before July 29, 1999. However, usually you need to pay the premium for at least 24 consecutive months when you purchase a PMI.
4. How do you know that you have built up 20% home equity?
Paying off 20% mortgage loan does not always imply that you’ve been able to build up 20% equity on your home. This is because the home equity varies with the home value; the equity on the property increases if it appraises in value and if you make your mortgage payments on time. The equity also increases when you make improvements on your home. You have 20% home equity when you owe not more than 80% of your current home value.
5. How can you avoid purchasing a PMI?
You can avoid purchasing a PMI even if you’re not able to make at least 20% down payment on a home. Usually, the lender waives off PMI if the borrower agrees to pay more on interest. You can also borrow the required amount from your friends and family members or take out an 80-10-10 loan to avoid purchasing the mortgage loan insurance. In this type of loan, you make 10% down payment and take out 2 mortgages, one financing 80% of the home price and the other financing the remaining 10%.
You can take help of online forums if you have any other questions on Private Mortgage Insurance. Just post your queries on mortgage loan insurance to the forums and experienced professionals will answer your queries.