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Private Mortgage Insurance

Private Mortgage Insurance (also known as “PMI” or “Mortgage Insurance” or “MI”) is a type of insurance applicable to Conventional mortgage loans that protects the lender against losses due to foreclosure. Compared to FHA and VA loans, where the insurance is provided by the Federal government, MI is provided by private insurance companies, hence the name.

The benefit of MI to a borrower is the ability to obtain a mortgage loan with a lower down payment (or lower equity, in the case of a refinance). Before the existence of MI, most mortgage lenders would not grant a Conventional mortgage loan without at least a 20% down payment.  With MI, lenders will now make a mortgage loan with no down payment/equity.

MI is typically required on mortgage loans with less than a 20% down payment. MI is paid by the borrower and obtained by the mortgage lender. There are approximately seven insurance companies that provide MI, and their rates for this type of insurance are virtually identical. 

Although there are various payment options available for paying the insurance premium, the most common is the monthly payment option. Under this option, the premium is included in the monthly mortgage payment that the borrower pays to the mortgage lender, and the lender passes this amount through to the insurance company. 

The cost of MI will vary depending upon the amount of down payment  – the more the down payment, the lower the cost. For example, for a $100,000 loan amount, the monthly MI premium for a loan with a 5% down payment is approximately $56, and for a loan with a 10% down payment is approximately $33.

Beginning is 2007, MI become a tax deductible item similar to mortgage interest if the borrower's annual Adjusted Gross Income was $100,000 or less.

Canceling MI

Under certain circumstances MI can be cancelled:

The lender is required to cancel the MI when the mortgage balance reaches 78% of the property’s original appraised value. 

When the mortgage balance reaches 80% of the property’s original appraised value, the borrower may request that MI be cancelled.  In order for the lender to grant the request, the mortgage payments must be current, there must be no other loans on the property, and the lender must be satisfied that the property value has not declined.

After 2 years has transpired (from date of closing), if the mortgage balance reaches 78% of the property's current appraised value (as evidenced by a new property appraisal) the borrower may request that MI be cancelled. 

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