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Introduction to Private Mortgage Insurance (PMI)

If you cannot afford the typically required 20% down payment you can use the so called private mortgage insurance (PMI), which assists you into getting into the desired home. Most people, especially young ones, fail to allocate money for the purchase of their own home. However, they want to take advantage of the tax benefits and potential investment benefits that come with the purchase of a home.

How PMI Works?

In case you default on a loan and are not able to make the needed monthly payments, the PMI will pay the mortgage on your behalf.

Most lenders require this type of insurance for people that lack substantial equity, since it is considered that they take higher risk with such clients.

If you have managed to save some money for the purchase of a home you should check how many percents of a down payment this money represents. The higher the price of the property gets, the lower the percentage of the down payment. If you select to purchase an expensive house, then you may be required to make a PMI. How much you will be charged for the PMI depends on the amount of the loan you are applying.

The Homeowners Protection Act of 1998 made some new introductions regarding PMIs, which are applied to mortgages signed after July 29, 1999. These new provisions require that when the 22% equity in the home has been reached as compared to the original value of the property, the PMI should be automatically terminated. Under certain conditions you can request the automatic termination of the PMI when 20% of equity has been reached.

An exception from this rule can be made in either of these cases:

  • Your loan is classified as "high" risk
  • Failure to maintain current payments
  • Other liens on the property

On the other hand, if you have signed the mortgage before July 29, 1999, you can still request the cancellation of the PMI when the equity of 20% has been reached. However, your lender is not required to accept your request.

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