When you only have the money to pay less than 20 percent down payment of your mortgage, chances are you will need a private mortgage insurance to help you secure a loan. What a private mortgage insurance or PMI does is it provides protection to the lender by guaranteeing payment in case of default from borrower. The borrower will in turn pay a monthly mortgage insurance fee. This way, a lending company will allow a lesser down payment than what they would normally accept.
Cost of PMI
The cost of PMI depends on how much down payment the borrower pays and for his credit file review. Also, the higher the amount of the down payment, the lower the insurance rate will ultimately be. For example, a 15 percent down payment is less than the cost of PMI on a 10 percent down payment. The PMI premium is then added to the monthly amortization.
Canceling PMI
Private mortgage insurance can be very hard on the pocket because the PMI companies can charge up to hundreds of dollars depending on your credit. It can catch you by surprise to see that your monthly amortization has jacked up by more than half by the time you are already signing the papers. In the event that you want to cancel your PMI, what are your options?
Even with the amount of equity on your home, the final decision of terminating the PMI is reserved by the lender and concerned investors. But in most cases, the lender allows cancellation of the PMI when 80 percent of the original property value has been paid for. Other lenders require that you pay PMI for one or two years before they concede to terminating it. If you wish to cancel your PMI, contact your lender. An appraisal will be conducted on your property to determine current value and you will have to pay for the cost of this appraisal. Another option for you is to refinance your home because that way, you can take a new mortgage on your home without PMI.
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