PMI

Private Mortgage Insurance, or PMI, is an insurance payment required of the lender when the borrower does not have sufficient equity in a home. PMI is normally required when the equity in the home is less than 20%.

For example, if the buyer of a $200,000 home does not place a down payment on the home of at least $40,000, then the lender will probably require the borrower to pay PMI.  This insurance payment is collected by the mortgage company on a monthly basis, along with monies for an escrow account.

Once a homeowner has at least 20% equity in the home, payment of PMI is no longer necessary. For example, if a home was purchased in 2006 for $200,000, and included a loan of $180,000, this means the buyer only had $20,000, or 10%, equity in the home and may have to pay PMI.

If that same home was worth $250,000 in 2011, and the remaining principal on the loan was $165,000, the homeowner now has $250,000 - $165,000 = $85,000 in equity.  This represents a 34% equity stake in the home. In this situation, PMI should no longer be necessary.

Since PMI is collected as part of the monthly mortgage payment, some borrowers may be paying for insurance that is no longer required.  Lenders have an application process that can remove the requirement for PMI; however, a professional appraisal may be required to authenticate the value of the home.