Private Mortgage Insurance PMI
Definition of 'Private Mortgage Insurance PMI'
Private Mortgage Insurance (PMI) is also known as Lenders Mortgage Insurance (LMI). This is typically insurance that a lender requires a borrower takes out to cover the shortfall if the borrower is unable to repay the debt and the lender has to foreclose on the property and the amount recouped from the sale of the foreclosed property does not offset the entire debt.
This type of insurance is usually only required if the downpayment is less than 20% of the sales price or appraised value (i.e. if the loan-to-value ratio (LTV) is 80% or more). Once the principal is reduced to 80% of value, the PMI is usually no longer required.
This can happen when (1) the principal has been paid down or, (2) when the home value appreciates or, (3) a combination of both. In the case of lender-paid MI, the term of the policy can vary based upon the type of coverage provided (either primary insurance, or some sort of pool insurance policy). Borrowers typically have no knowledge of any lender-paid MI, in fact most "No MI Required" loans actually have lender-paid MI, which is funded through a higher interest rate that the borrower pays.
TIP: Do you have a mortgage that had a loan-to-value (LTV) ratio of 80% or more that require PMI? If so, then keep an eye on your LTV. If it drops below 80% then you may no longer be required to pay PMI which you can then cancel and save the fees.
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