Real Estate Terms: Understanding Pmi

An explanation of Private Mortgage Insurance (PMI).

If you have considered purchasing real estate without making a down payment of at least 20 percent, you may have heard of Private Mortgage Insurance or PMI. Before you agree to sign up for PMI it is important to understand what it is and under what circumstances it may be beneficial to you.

What exactly is PMI?

Private Mortgage Insurance is an insurance policy on your mortgage. It protects the lender if you default on your loan. When you put less than 20 percent down on the purchase of your home, the lender assumes more risk. Since mortgage lenders do not like risk, they often require the borrower to get PMI when the down payment is small.

Generally, the insurance payment is added on to the borrower's mortgage payment and the lender passes the premium to the mortgage insurance firm. The amount charged for PMI is dependent on the size of the loan and the amount of the down payment.

While PMI is an added expense, it often allows people who can afford a sizable monthly payment but do not have the money required for a down payment to purchase a home. In other instances, it allows people to purchase more expensive homes without coming up with additional down payment funds.

How to remove PMI

Once the equity you hold in your property reaches 20 percent, it is usually possible to remove the PMI policy from your loan. In some instances the law allows lenders to continue requiring PMI up to a higher loan to value ratio, for example with high-risk borrowers.

If the principal payments you have made add up to 20 percent or more of the value of the loan, you should contact your lender in writing to request that they remove the requirement for PMI from your account. Even if your payments do not exceed 20 percent of the loan value, it may be possible to remove PMI. If home values have increased such that the equity you hold in your property is greater than 20 percent, you may be eligible to remove PMI. If you feel this is the case consider hiring an appraiser to assess the current value of your home. While you will have to pay for the appraisal fee, the removal of the PMI should more than pay for this fee after several months. If the value is shown to be adequate, send a copy of this documentation to your lender with a request for the PMI to be removed.

Is PMI tax deductible?

Private Mortgage Insurance is not tax deductible. Since it is an insurance payment and not actually part of your mortgage principal and interest, there are no tax advantages to PMI. For this reason, some lenders offer alternatives to PMI for people with low down payments.

Alternatives to PMI

Since PMI payments are not tax deductible, some borrowers prefer different loan terms. For example, some lenders do not require PMI if the borrower is willing to pay a higher interest rate. Other borrowers use a combination of loans to finance their real estate purchases. For example, someone putting down 10 percent on a home may take out one mortgage for 80 of the home's price, and a second loan for 10 percent of the price. The second mortgage of 10 percent would be at a higher interest rate, but the combination of the two payments is often less than adding PMI to a payment. And, since the interest on both loans is tax deductible, there are tax advantages with this method of financing.

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