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Most new home buyers are not even aware of private mortgage insurance until they have been told that they are paying for it. Private mortgage insurance is not for borrowers, it is for lenders.
Commonly referred to as "PMI" private mortgage insurance protects the lender in the event that you default on your mortgage loan before you finish paying it off. This figure is included in lenders mortgage loan calculations when determining how much money you can borrow on your home. The higher your down payment, the less likely your lender will be to request private mortgage insurance. Homeowners who have at least 20% down are not required to have private mortgage insurance.
PMI can be expensive, and the less money you put down on your home, the more it will cost you on a monthly basis. The rates are based entirely on the difference between the amount you put down on your home and the amount needed to reach 20% of equity. Your credit report has no bearing on your rate.
The Homeowner's Protection Act (HPA) of 1998 made it a rule that lenders notify borrowers when they have reached an equity level of 20% allowing them to cancel PMI. Automatic cancellation must be done when the loan to value ratio becomes 78% if not previously canceled.
|Jennifer Mathes, Ph.D.|