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What is PMI?
Private Mortgage Insurance, also known as PMI, is a supplemental insurance policy you may be required to obtain in order to get a mortgage loan. PMI is provided by private (non-government) companies and is usually required when your loan-to-value ratio — the amount of your mortgage loan divided by the value of your home — is greater than 80 percent.
PMI isn't a bad thing — it allows you to make a lower down payment and still qualify for a mortgage loan. In fact without PMI, many of us would not be able to purchase our first home.
How is PMI calculated?
Your PMI premium is fixed based on plan type (loan-to-value ratio, loan type, loan term, etc.) and is not related to your particular credit history or other individual characteristics. PMI typically amounts to about one-half of one percent of your mortgage amount annually, according to the Mortgage Bankers Association, and the premium payment is usually rolled into your monthly mortgage payment. On a $200,000 mortgage, you may be paying $1,000 per year for PMI.
For loans made since July 1999, lending institutions are obligated (by federal law) to automatically cancel Private Mortgage Insurance (PMI) when the loan balance gets below 78 percent of your purchase price - but not when the borrower achieves 22 percent equity. (Certain "higher risk" loans are not included.) However, you can actually cancel PMI yourself (for mortgages closed after July 1999) when your equity gets to 20 percent, regardless of the original price of purchase.
Verify the numbers
Study your loan statements often. You'll want to be aware of the prices of the homes that are selling in your neighborhood. If your loan is under five years old, it's likely you haven't paid down much principal - you have been paying mostly interest.
You can start the process of canceling your PMI when you you think that your equity reaches 20%. You will need to contact the mortgage lender to alert them that you wish to cancel PMI payments. Then you will be asked to verify that you have at least 20 percent equity. A state certified appraisal documented on the appropriate form (URAR-1004 - Uniform Residential Appraisal Report) is the best proof there is - and almost all lenders require one before they agree to cancel.
At Allegiant Mortgage, LLC, we answer questions about PMI every day. Call us at (615) 717-3185 or (615) 417-2129.