What is a Private Mortgage Insurance (PMI)?

Published by Thomas Herold in Banking, Real Estate

'Private Mortgage Insurance (PMI)' is explained in detail and with examples in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

PMI is the acronym for Private Mortgage Insurance, also known sometimes as Lenders Mortgage Insurance. PMI proves to be insurance that is paid to a lending institution that is required much of the time when an individual gets a mortgage loan. Such insurance is used to cover any losses that arise if a person is not capable of paying back their mortgage loan.

Should the lender not be able to recoup all of its costs in foreclosing on and selling the mortgaged property, then PMI insurance covers the remaining losses that exist on the balance sheet of the bank or other lender. The general rates for this Private Mortgage Insurance turn out to be around $55 each month for every $100,000 that is actually financed. On a $250,000 loan, this amounts to $1,875 each year in premiums.

Private Mortgage insurance yearly costs range though. They are usually given out in comparison against the entire loan’s value. This depends on a number of factors, such as loan type, loan term, actual coverage amount, amount of home value that the person finances, the premium payment frequency that might be monthly or yearly, and the individual’s credit score. While PMI can be paid in advance with closing costs, it can also be worked into the loan payments with single premium PMI.

Private Mortgage Insurance is generally only necessary when the down payment proves to be smaller than twenty percent of either the appraised value of the property or alternatively of the sales price. When then loan to value ratio is greater than eighty percent, you can expect to be required to carry it. As the principal is reduced with monthly payments, or the home value rises through real estate appreciation, or a combination of the two occurs, then this Private Mortgage Insurance might not be required any longer. At this point, the home owner is allowed to discontinue paying for the PMI insurance.

There are some banks and lenders who will insist that PMI be paid for minimally for a pre fixed period of time, such as two to three years. This is regardless of whether the principal value of the property exceeds eighty percent in a shorter amount of time. Banks do not have to permit a person to cancel this insurance legally until the loan has amortized down to a Loan to Value ratio of seventy-eight percent of the original price for which the house is purchased.

A cancellation request must originate from the mortgage servicer. They must send it to the issuing company that made the PMI policy in the first place. Many times, such a mortgage servicer will insist on a current home value appraisal being done in order to ascertain the actual loan to value ratio.

Premiums paid for mortgage insurance were not tax deductible according to the Internal Revenue Service in the past. In 2007 this changed. Now all PMI premiums are considered to be fully reducing of your income for the year in question.

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The term 'Private Mortgage Insurance (PMI)' is included in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.