If your down payment on a home is less than 20 percent of the appraised value or sale price, you must obtain private mortgage insurance (PMI) with your lender. PMI protects your mortgage lender against any default on the home loan. Because of this protection you are able to purchase a home with a lower down payment.
Another option to private mortgage insurance is called Lender Paid Mortgage Insurance. This means that the lender will give you a slightly higher rate instead.
Generally speaking, PMI drops off of your monthly payment once you have paid down your mortgage loan to 80% of the home value. In some cases, you will need to request in writing that the PMI be removed at this point. To understand the particular terms your lender has written into your mortgage, carefully review your mortgage disclosures or consult a mortgage loan specialist.
It should also be explained that PMI Private Mortgage Insurance has been made tax deductible for many American households for new mortgages in 2007. The tax deductibility of mortgage insurance allows borrowers who qualify to more easily compare single mortgages with so called "combo loans" or "80/20" financing.
Borrowers whose household income exceeds the limit for tax deductibilty of PMI can still qualify for Lender Paid MI. Lender Paid MI (LPMI) means the lender is paying the MI premium as part of your increased interest rate.
Certain homeowners qualify for programs with reduced PMI. MyCommunity is an example of a program with reduced PMI.
PMI, also referred to as Private Mortgage Insurance, is a type of insurance that protects the lender against mortgage loan defaults by customers. Understand, that this insurance does not protect you as a homeowner in any way. PMI is not going to help you save your home if your home is foreclosed upon and PMI is not going to protect your home or it's contents if your home burns down, a tornado hits your house or any other disaster happens. Hazard insurance, also referred to as homeowners insurance is the insurance that protects you in case of fire, theft, etc... PMI will simply help you buy a home or refinance your home with little to no equity in your home. It protects the lender and gives them more protection on their mortgage loan to you.