What is PMI (Private Mortgage Insurance)?

PMI (or Private Mortgage Insurance)

is usually required when you purchase a home with less than a 20% down payment. Designed to protect lenders against the costs of foreclosure, PMI is most often provided by private mortgage insurance companies, such as MGIC (Mortgage Guaranty Insurance Corporation), GE Mortgage Insurance, et al.

PMI is an additional expense typically collected with your monthly your mortgage payment. The cost (monthly premium) of PMI varies depending upon the size of the down payment or, from the lenders perspective, by the Loan-to-Value (LTV). The cost of this monthly premium is higher for lower down payments.

Can PMI ever be cancelled? Yes, here are a few common ways:

Once you feel that the mortgage balance as a percentage of your current home value is at least 80% (Loan-to-Value or LTV), you may contact your lender or mortgage servicer. In most cases, an appraisal will be required to determine the value of your property, the cost of which you can expect to pay. Although there is no law requiring lenders to remove PMI even if an appraisal supports a value of your home sufficient to bring the LTV down to 80% or less, many lenders may do so, after taking additional information into consideration, such as your mortgage repayment history. If you've been late on your mortgage, that may have a serious impact on the decision to remove PMI.

Another thing you may do is try to refinance into a new loan without PMI as long as the appraised value on the new loan supports at least an 80% Loan-to-Value.

Is PMI tax deductible? As of January 1, 2007, Congress passed a bill making Private Mortgage Insurance a tax deductible item for new borrowers whose adjusted gross annual income (personal) is at or below $100,000. The benefit for millions of new homeowners is a potential savings of hundreds of dollars in reduced tax liability (thereby reducing the cost of financing) or an opportunity to afford a slightly more expensive home. Consumers can now breathe a little easier in their dislike of this much maligned mortgage related expense.