Private Mortgage Insurance
 cenario: a buyer with a down payment of less than than 20% and PMI defaults on a loan.
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| When the lender decides to foreclose, the PMI company either pays off the lender, or allows the lender to take title of the property and covers the difference between the selling cost received and the loan. |
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PMI coverage is based on the following:
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- The down payment
The more money down, the lower the risk for the lender and the lower the cost to you.
- The loan type
Fixed-rate loans are more stable than ARMs, so the more fluctuation and risk in the loan structure, the higher the premium you pay.
- The coverage type
In some situations, PMI premiums may be refunded when the owner achieves 20% equity. The premium for refundable policies is usually higher than for nonrefundable.
- The payment structure
Some policies are monthly, others are one-time payments due at closing.
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Payment Structure
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Many PMI policies have a large, up-front fee. This fee ranges from one month's payment to a year's worth of payments collected by the lender and paid to the insurer, and two months worth of premiums held by the lender as a reserve.
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If you need to keep closing costs down, you can choose a policy of non-refundable monthly premiums.
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When to stop paying
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You should track your policy over time. At some point, you will have paid off your mortgage enough to reach 20% equity, thereby allowing you to drop the coverage. (Make sure this is allowed under your agreement. Some require the insurance for the life of the loan).
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When you approach the 20% equity level, contact the lender to see what the requirements are for dropping coverage.
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Some lenders require an appraisal, paid for by the borrower, showing at least 20% equity, or similar proof. Try to get confirmation of termination policies in writing when negotiating the loan.
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