What is PMI? Can I get rid of the PMI on my loan?

PMI, or Private Mortgage Insurance, is normally required when buying a house with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage-insurance companies. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, one may not be able to buy a home without a 20% down payment.

The cost of PMI increases as the down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. The PMI premium is normally added to the monthly mortgage payment.

The decision to cancel the private insurance coverage does not depend solely on the degree of the equity in the home. The final decision on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. Some lenders may require that the borrower pay PMI for one or two years before the borrower may apply to remove the PMI.

To cancel the PMI on a loan, it is advisable to contact the lender. In most cases, an appraisal will be required to determine the value of the property. The homeowner may be required to pay for the cost of this appraisal. Another way of cancelling the PMI on a loan is to refinance and to get a new loan without PMI.