About Private Mortgage Insurance

Private mortgage insurance (PMI) is a type of insurance that helps protect mortgage companies against losses due to foreclosure. This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed.

PMI also enables mortgage companies to grant loans that would otherwise be considered too risky to be purchased by third party investors like the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).

The ability to sell loans to these investors is critical to maintaining mortgage market liquidity, which in turn, allows mortgage companies to continue originating new loans.

Americans Earning Less, Saving Less

Why is PMI needed? Relative to the growth in home prices over the last quarter century, Americans are earning less and, as a result, saving less. This means many families today are being forced to wait longer than their parents and grandparents before buying their first home.

One way to reduce this wait is through PMI — and many families are taking advantage of it. Recent government statistics show that one of every two homebuyers obtained a low down payment loan; and many of them used private mortgage insurance (PMI) to realize their homeownership dream.

The Importance of Recognizing When to Get Rid of PMI

Most lenders require Private Mortgage Insurance (PMI) if the borrower has less than 20% equity in a home. One of the more difficult things for most homeowners is determining when their home equity has risen above the 20% point. Failure to recognize this significant event will leave you paying a higher mortgage payment than you need to be paying.

In fact, with appreciation in your home value, you might already have more than 20% equity and not know it! The best way to determine the value of your home is through an appraisal. While the Homeowners Protection Act of 1998 requires that lenders drop PMI payments when the loan to value ratio conditions have been met, most require an appraisal to support the homeowner's assertions of the value increase.

Getting an appraisal now and dropping your PMI payments will significantly reduce your monthly mortgage payments — and save you thousands of dollars.

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