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If you put down less than twenty percent on a mortgage, you will also pay private mortgage insurance. This type of insurance is commonly referred to as PMI. PMI is different from homeowners insurance, which protects the physical property and your belongings in the case of damage.
Private Mortgage insurance is designed to protect the lender in the event that the borrower defaults on their loan. PMI does not protect the borrower or homeowner against foreclosure. However, it allows people who cannot afford to put down twenty percent on a home to become homeowners.
If your lender determines you’ll need PMI, they will contact and coordinate with a Private Mortgage Insurance provider. Once the payment plan terms have been decided, the lender will provide details of the payment plan before you close on the mortgage.
The higher your credit score, the lower your monthly PMI payment will be. With a credit score of 740 and a 10% down payment on a $400,000 home, your monthly premium would be approximately $97. For the same loan, a 620 credit score gets you a $407 monthly PMI bill!
Private Mortgage Insurance is not permanent. Once you reach twenty percent equity, either by paying down your balance or through rising home sales, you can contact your loan servicer or lender to remove the PMI from the mortgage. When your loan balance reaches eighty percent of the home’s original value, the PMI is eligible for termination.
The Home Owners Protection Act deemed it mandatory that PMI payments are stopped once the mortgage balance reaches 80% of its value. You must have a good payment history and cannot have any second liens as part of the conditions for the release of the PMI.
Obviously, eliminating your PMI payments will save you a lot of money every month. Some people try to pay down their mortgage as quickly as possible to reach 20% equity. Others try to raise their credit score and refinance so that their new PMI payments will be lower. However, with housing prices soaring across the nation, a simple appraisal and refinance might be all that you need to cross the equity threshold and drop the PMI payments for good.