Private Mortgage Insurance, or PMI, is a type of insurance that a borrower is sometimes required to purchase to qualify for a home mortgage. Lenders often require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price. A PMI policy protects the lender’s investment when default occurs. It does not protect the homeowner.
There are different types of PMI. The most common is Borrower-Paid Mortgage Insurance (BPMI), which is found with conventional mortgage loans. BPMI premiums are wrapped directly into the monthly mortgage payment, which sometimes makes their cost, or even their existence, difficult to recognize.
BPMI is usually required if the loan-to-value (LTV) is above 80%. Once the LTV falls below 80%, the BPMI policy should be canceled by the lender. Unfortunately, lenders do not consider the appreciation of the property when calculating LTV. This means many homeowners satisfy the insurance requirements yet continue to pay premiums due to an outdated valuation.
Lenders do not have a problem with homeowners paying for insurance that they do not need. Some homeowners pay thousands of dollars over several years for unrequired mortgage insurance.
If you are paying for PMI and believe you have more than 20% equity in your home, you should contact your lender and ask that the policy be canceled. It may save you a significant amount every month that could instead go towards the principal. If you have questions about PMI, termination requirements, or your loan to value, please let us know. We would love to help you do away with an unnecessary insurance expense.
