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What Is PMI?
. . . And why has it been added to my mortgage statement?
Mortgage statements can sometimes be confusing. A bill that you thought would only show your principal plus interest totals might also contain charges for an escrow account that covers your home insurance, taxes, and PMI. You might be wondering, “So, who is this PMI and why is he also getting my money?”
PMI stands for Private Mortgage Insurance. If you put down less than 20% when you bought your home, you’re probably paying PMI. It is an insurance that protects the lender from default on a loan. Many first-time homebuyers don’t have 20% saved up when they buy a home, so the lender is taking on a bigger risk to loan more money on the home purchase. The amount of your monthly PMI charge is determined by the percentage you put down, the amount you borrowed, and your credit score.
So, how long will you have to pay PMI if it is currently on your statement? That was determined up front by your amortization schedule. According to the Homeowner’s Protection Act of 1998, as long as you are current on your mortgage payments and do not have an FHA loan, the lender is required to cancel PMI once the balance reaches 78% of the original purchase price.
If you are trying to pay more toward the principal every month to reach the 80% more quickly, you can call and request that the lender drop the PMI, but that is a case-by-case determination. Also, if you get improvements on your home that you believe have raised the value of your home, you can request a new appraisal and submit that for consideration to have your PMI dropped.
If you have just started the home-buying process and want to avoid PMI all together, you need to either find a way to put down 20% up front or take out a piggyback loan. With this loan, you could put down 10%, take out a main loan for 80%, and you would get a piggyback loan for the remaining 10%.
If you have questions about any of this, give me a call and I’ll walk you through everything. Don’t let a seemingly confusing mortgage statement keep you from experiencing the joy of being a home owner!
A short synopsis of PMI: