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Last Updated: May 14th, 2012 - 22:24:01 |
When you buy a home and get a conventional mortgage loan (one that is not insured by the FHA) you may have a mortgage insurance premium added to your monthly payment.
If your down payment is less than 20% of the home's value the lender fears you have too little at stake and the odds of foreclosure increase. Statistics show that the more money you have invested in your home, the less likely you will default on loan payments.
It's called Private Mortgage Insurance or PMI. It protects the lender... not you. If the lender is forced to foreclosure on your home it will be sold at auction.
If the winning bid at the auction does not cover the amount owing to the lender the insurance company pays the lender the difference.
More below...
PMI reduces the lender's risk and allows the lender to offer home loans at lower rates than might otherwise be available.
The cost of the PMI is added to your monthly mortgage payment.
As this is being written the monthly premium for PMI for the first 20 years of a 30-year mortgage varies with the size of the down-payment.
For a mortgage with a down-payment of 5%, a typical monthly PMI premium is 0.78%/12 of the initial mortgage amount.
A 90% loan-to-value ratio (down-payment of 10%) requires a monthly premium of 0.52%/12 of the initial mortgage amount.
The monthly premium for a mortgage with a 85% loan-to-value ratio is 0.32%/12 of the initial mortgage amount. Beyond 20 years, the monthly PMI premium changes to 0.20%/12 of the initial mortgage amount, no matter what the down-payment.
The PMI insurer normally collects an escrow equal to two months' premium at the beginning of the mortgage.
There are three ways to cancel your PMI. The first is when your regular monthly payments have paid down the loan balance to less than 78% of the original appraised value of the home.
The 2nd way allows you to cancel the PMI when you've paid the balance due on the loan down to 80% of the original appraised value of the home. The lender will usually require that you pay for an appraisal.
What if you are in an area where home prices have experienced large gains in value and the current value of your home is well above your original purchase price?
Seldom will a lender allow the PMI to be cancelled during the first two years that you own the home. After that you may have a chance to have it cancelled.
If prices have risen so that the loan balance is 75% of the home's potential selling price you can ask the lender to lift the insurance. They will usually oblige although you may have to pay for an appraisal.
Warning: Don't be late with your mortgage payments. Your lender has the right to continue the PMI if you have a poor payment history of your home would be
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