Finance Quick Answers
What is Private Mortgage Insurance or PMI?
If the downpayment on your home loan is more than 20% of the home's value, your home is the loan's only collateral. If, however, your downpayment is less than 20%, the lender will also require that you purchase private mortgage insurance (PMI). PMI protects the lender if you default on the mortgage.
Payment of PMI works in one of three ways:
1. You pay an upfront fee of about 0.5% of the loan.
After that, you usually pay an annual fee of one-third
of 1% per year.
2. You don't pay anything upfront, but your monthly
payment is higher to make up for that fact.
3. The lender pays the PMI. Under lender-paid
mortgage insurance (LPMI), the lender pays the insurance
in exchange for you accepting a higher interest rate on
the loan. (Ask your lender to run the figures both
ways--PMI and LPMI--to see which would cost you less.)
If you got your mortgage after July 29, 1999, your lender is required by law to discontinue your PMI payments after you have paid off 22% of your principal (provided you always pay on time). Most lenders will allow you to discontinue PMI once you have paid off more than 20% of the original loan amount. If you think you have met the 20% payoff of principal requirement, ask your lender if your PMI can be dropped.
Brenda Procter, M.S., Consumer and Family Economics, College of Human Environmental Sciences, University of Missouri-Columbia
If you'd like to learn more about this and other personal finance topics, the University of Missouri offers 'Personal & Family Finance,' a correspondence course, through the Center for Distance and Independent Study (800-609-3727). Information about this course is available at http://cdis.missouri.edu/CourseInfo/DetailCourseInfo.asp?1985.
Last update: Tuesday, July 22, 2008