PMI or Private Mortgage Insurance is an insurance which guarantees and protects the lender against non-payment in case the buyer defaults on the loan. To correct misinterpretation, PMI is not an additional insurance coverage to the homeowner. Rather, it is for the protection and advantage of the lender who takes a risk on buyers with less equity. It also gives the bank insurance just in case the buyer fails to fulfill the responsibility of mortgage payment.
PMI is required by the lender or the bank only when the buyer gives a down payment that is less than 20% of the selling price asked for the property and is added to the buyer’s monthly payment. How much PMI would cost depends upon several factors such as the loan amount and the insurance carrier. PMI benefits the buyer since it allows him or her to acquire the property with less down payment and at the same time protects the lender against defaults. Through PMI, the dream of many to own a home became more possible especially for those who find home rental fees a financial problem.
If the buyer wants to get away with PMI, he or she has to reach 22% home equity based on the original value of the property. This has been made possible through the automatic termination of PMI established by the Homeowners Protection Act signed on July 29, 1999. A PMI termination can also be requested upon reaching 20% home equity only if your mortgage was signed after the established date (1999) of the PMI termination.