PMI is an acronym for Personal Mortgage Insurance. It has probably been around for a good long while, but it became of major importance over the last ten years as houses have rocketed up in value and obtaining a mortgage to buy one became more and more of a challenge. The traditional mortgage has always topped out at eighty percent of the home’s sales value. Today, millions of people cannot assemble the tens of thousands of dollars required to pay a twenty percent down payment, even on a relatively modest home. Lenders have determined that any mortgage on a home for more than eighty percent of the home’s value must be insured by a PMI policy, so that they – the lender – are protected if you default on the loan.
What that does is add an additional sum to your monthly mortgage payment, often $100 dollars or more. It’s expensive, and you are required to pay it until you have are far enough through the mortgage cycle to have gained twenty percent equity in the house. Then the question becomes which twenty percent? Is it derived from the home’s purchase price, or the home’s current value? It is the latter, you’ll be paying the insurance bill for a longer period.
Moreover, you aren’t going to be in a position to shop around for your Personal Mortgage Insurance, even though it’s personal. It will be provided by the lender. Accordingly, if you enter into a mortgage that requires PMI, make sure you know at exactly what point that insurance policy is no longer required. PMI became a very lucrative sidelight for many lenders, some of whom were a little careless about ending the policy on time and others that ignored the issue altogether.
That led to the Homeowner’s Protection Act of 1998 which allows you to request the cancellation of your Personal Mortgage Insurance, once you have 20 percent equity in your house. Your mortgage holder has the option of canceling it, but as long as your payment record is good, you shouldn't have a problem ending it. Once your equity reaches 22 percent, lenders are required to cancel PMI. If it isn't canceled, the lending institution is subject to fines and payment of your legal fees. The lender also must return any premiums you paid beyond what you really owed. You must be informed, in writing, when you close on your house that you have private mortgage insurance. Lenders must explain PMI, and when you can cancel it. Your lender must notify you annually about when you can cancel your PMI.
That’s the federal law on the issue, but you should be in a position to demand specific timetables and cancellation dates on this policy. It has to do with what portion of the loan’s early payment years are applied to interest and how much to equity. This is an issue you should study carefully before you enter into a mortgage agreement that includes PMI. It’s still considered a cash cow by major lenders and they still insist on it, even though home defaults are down significantly over the last couple of years.
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