WHAT IS PRIVATE MORTGAGE INSURANCE (PMI)?

Private Mortgage Insurance (PMI) is a type of insurance that borrowers might be required to pay for if they have a conventional mortgage loan and make a down payment of less than 20% of the home's purchase price. PMI protects the lender, not the borrower, in case the borrower defaults on the loan.

Here are some key points to understand about PMI:

1. Purpose: PMI reduces the risk faced by the lender. Since a lower down payment represents a higher risk to the lender (as the borrower has less equity in the property), PMI provides financial protection to the lender if the borrower fails to repay the loan.

2. Cost: PMI typically costs between 0.3% and 1.5% of the original loan amount per year, though the rate can vary based on the size of the down payment and loan, among other factors. This cost is often divided into monthly premiums and added to your mortgage payment.

3. Cancellation: Once you reach 20% equity in your home (based on the original appraisal), you can request the lender to cancel the PMI. Under the Homeowners Protection Act (HPA) in the U.S., lenders are generally required to terminate the PMI automatically once you reach 22% equity in the home, as long as you're current on your payments.

4. Loan Types: PMI is specifically associated with conventional loans. Other types of loans have their forms of mortgage insurance. For instance:

- FHA loans come with two types of mortgage insurance premiums: an upfront premium and an annual premium.

- VA loans typically come with a one-time funding fee instead of monthly insurance.

- USDA loans also have an upfront guarantee fee and an annual fee.

5. Tax Deduction: Depending on the tax laws in place, PMI premiums may be tax-deductible. However, this can change based on legislative decisions, so it's essential to check current tax laws or consult a tax professional.

6. Avoiding PMI: Besides making a 20% down payment, there are other methods to avoid PMI. One common method is the "piggyback loan" or "80-10-10" loan. This involves taking out a primary mortgage for 80% of the home's price, a second mortgage (like a home equity loan) for 10%, and making a 10% down payment. However, the feasibility and wisdom of this approach depend on interest rates and other financial factors.

If you're considering a mortgage with PMI, it's essential to understand the terms, costs, and your rights regarding PMI cancellation.