What Is Private Mortgage Insurance?

Private mortgage insurance, or PMI, insures the lender that they will be able to resell your home for enough money to pay off your mortgage in the event that you put up less than 20% of your home's value as a down payment. This type of insurance actually protects the lender. In other words, if you put less than 20% down when buying a home, the lender will require you to buy this insurance. The premium, or insurance payment, is included in the monthly mortgage payment.

How Much Does Private Mortgage Insurance Cost?

Typically, PMI costs about one-half of one percent of the amount of the home loan. So, for example, If you want to buy a home for $500,000, and you put nothing down, then your PMI will cost $2,500 a year, or an extra $208.33 a month. Keep in mind, this is only a general rule, and may vary; usually you must put something down in order to buy a home.

Do I Continue To Pay Private Mortgage Insurance After I've Paid 20% Into My House?

No. In 1998, Congress passed the home owners protection act which allows homeowners to request that the lender cancel private mortgage insurance when the mortgage loan-to-value ratio falls to 80%. The lender is required to cancel PMI when the ratio falls to 78%. This what came about because lenders in the past would continued to receive PMI payments long after the 20% down was paid for.

It is important to note, that your home's value is not taken into account when calculating the ratio: only the decline in the mortgage balance is what is looked at the to calculate the mortgage loan to value ratio. In other words, on your $500,000 mortgage note, you have to pay $100,000 off of your loan before you can get rid of your PMI insurance.