In a nutshell, PMI is a requirement for many lenders when your down payment is less than 20% of the value of the home. PMI is for the lender’s protection because if someone were to stop making payments on his or her loan, PMI compensates the lender for the difference between the actual down payment and the 20% figure.
If you need PMI to get your loan, PMI is included in your monthly mortgage payment. The cost for PMI is based on the amount of your down payment, your credit score and how much you’re borrowing.
With most types of mortgages, once your equity reaches 20%, you can request to have PMI removed. FHA loans are an exception. While those mortgages can be easier to obtain than other types, the insurance requirement doesn’t go away when you reach that 20% equity milestone.
Some creative options are available to avoid PMI, including getting a second loan that essentially boosts the value of your down payment up to 20%. Interest rates can vary on this type of second mortgage, so it’s important for you to discuss these options with your lender. You need to know which is less expensive for you – the PMI or the second mortgage.
In addition to having 20% equity in your home, getting rid of PMI requires you to make on-time payments, typically for at least the most recent 24 months. And if you’re hoping to eliminate PMI based on raising property values, you will need to pay for a new appraisal to show this to your lender. Otherwise, once your loan balance reaches 78% of the original value of the home, check with your lender to ensure the PMI requirement is lifted. The onus is on the buyer for follow-through.