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Author: Wills Smith discusses buying a house without a deposit

Private mortgage insurance is the insurance coverage that home buyers have to obtain if they are unable to make at least 20% of the home purchase price as down payment. In other words, this policy allows you to purchase a house by obtaining a loan that is more than 80% of the appraised value of your house. Lenders will choose the private mortgage insurance provider for you to protect them against loss in case you default on your home loan. The lender becomes the beneficiary but you have to pay the premiums.

What are the benefits of private mortgage insurance?

Private mortgage insurance is useful for you as a home buyer. It enables you to fulfill your dream of purchasing a house even if you do not have sufficient cash to put down 20% of your home’s value. When you agree to obtain this insurance, lenders will allow you to make down payment as low as 3% to 5%. It also protects your lender in case you are not able to repay you mortgage loan.

How much does private mortgage insurance (PMI) cost?

The cost of a private mortgage insurance policy depends on the size of your mortgage loan and the down payment you make. Typically, the cost of the insurance is about half of 1% of your home loan. Usually, you have to pay the premiums on a monthly basis but some lenders may also offer you an opportunity to pay the entire premium amount together at closing.

How can you cancel or terminate PMI?

The Homeowners Protection Act (HPA) of 1998 provides rules for termination or cancellation of PMI on home mortgages that originated before July 29, 1999. But HPA does not cover government-insured VA and FHA loans. As per this law, you can cancel or terminate your private mortgage insurance in the following 2 ways:

* Automatic termination: You can wait till you reach 22 % equity in your home based on its original value and get the PMI automatically terminated.
* Request for cancellation: You can also ask your lender to cancel the PMI when you have paid down the home loan to a point that it equals 80% of the original appraised value of your home or the purchase price, whichever is less.

Private mortgage insurance helps you to purchase your house whenever you wish to do so. With PMI, you do not have to wait to accumulate a large down payment in order to fulfill your dream of owning a house.