PMI

Private Mortgage Insurance or PMI is an insurance payment that is 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 new home that costs $100,000 does not place a down payment on the home of at least $20,000, then the lender will probably require the borrower to pay PMI as part of the monthly mortgage payment.  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 1998 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 might have to pay PMI.

If that same home was worth $250,000 in 2005 and the remaining principal on the loan was $165,000, the then homeowner now has $250,000 - $165,000 = $85,000 in equity or 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.