Private Mortgage Insurance helps you get the loan
Private Mortgage Insurance, also known as PMI, is a supplemental insurance policy you may be
required to obtain in order to get a mortgage loan. PMI is provided by private (non-government)
companies and is usually required when your loan-to-value ratio — the amount of your mortgage
loan divided by the value of your home — is greater than 80 percent.
PMI isn't a bad thing — it allows you to make a lower down payment and still qualify for a
mortgage loan. In fact without PMI, many of us would not be able to purchase our first home.
How is PMI calculated?
Your PMI premium is fixed based on plan type (loan-to-value ratio, loan type, loan term, etc.) and is
not related to your particular credit history or other individual characteristics. PMI typically
amounts to about one-half of one percent of your mortgage amount annually, according to the
Mortgage Bankers Association, and the premium payment is usually rolled into your monthly
mortgage payment. On a $200,000 mortgage, you may be paying $1,000 per year for PMI.
Eliminating Private Mortgage Insurance
For loans made after July 1999, lenders are required by federal law to automatically cancel
Private Mortgage Insurance
(PMI) when the loan balance falls below 78 percent of your purchase
price — not when you achieve 22 percent equity, which will happen much more quickly with rising
property values. (Certain "higher risk" loans are excluded.) But you have the right to cancel PMI
(for loans made after July 1999) once your equity reaches 20 percent, regardless of the original
Keep track of your principal payments. Also keep track of what other homes are selling for in
your neighborhood. If your loan is under five years old, chances are you haven't paid down much
principal — it's been mostly interest. But property values in many parts of the country have gone
through the roof lately. And that can earn you 20 percent equity even if you haven't paid down
When you think you've reached 20 percent equity in your home, you can begin the process of
freeing yourself from PMI payments! You will need to notify your mortgage lender that you want to
cancel PMI payments and you'll need to submit proof that you have at least 20 percent equity. A
state certified appraisal on the appropriate form (URAR- 1004 uniform residential appraisal report
for single family homes) is the best proof there is — and most lenders require one before they'll