Private mortgage insurance (PMI) is required by lenders when you can't come up with at least 20% of the cost of a home as a down payment. Here is a brief overview of PMI insurance and how it works.
PMI does not protect you personally against any loss for any reason. PMI is strictly to protect the lender in case you default on the loan. If you want a policy to protect you and your family, you'll have to get your own home insurance policy (this type of policy is also typically required while you have a mortgage). You should also consider a life insurance policy to pay off the mortgage in the event you or your spouse passes away unexpectedly.
How to Buy
The lender will set up the PMI insurance arrangements for you. You will sign the documents and pay for the policy.
How Much Does PMI Cost
The cost for PMI can range from a low of 0.25% to a high of 2% of the outstanding mortgage amount until you have paid off 22% of the home. There are several factors that go into determining the rate you will pay including the size of the loan, payment terms, and credit worthiness.
Paying for PMI
You have a couple of options when paying for PMI insurance. You can either pay it as a lump sum payment or you can set up the insurance monthly payments to be incorporated into the monthly mortgage payments. Monthly payments are the most common arrangement since people who need PMI insurance often cannot afford the lump sum payment.
At times, the premium for PMI is tax deductible, and other times it is not. The premiums became tax deductible with the presidential signing of the Tax Relief and Health Care Act of 2006, but this legislation ended in 2014 and has not been extended by congress for 2015. However, this can change at any time and you should consult with your tax adviser to determine if the legislation was renewed.
How to Remove PMI
Once you have paid off 22% of the loan, your lender is supposed to drop the insurance policy and you are no longer required to have or pay for PMI insurance. This should happen automatically, but it doesn't always work out the way it should.
You should keep track of all the monthly payments that you have made, and figure out when you have paid off 22% of the value of the home. If you don't see the premium payments dropping off of your mortgage invoice after you have achieved paying off 22%, you should contact your lender and have them remove the premium. Talk to your real estate to see if they can help you get further informed.