What the heck is PMI? It might stand for “Please More Information!” since many home loan borrowers have no idea what it is and why they pay it.
PMI is Private Mortgage Insurance. Contrary to what we understand about PMI, it does not benefit the buyer and borrower of a new loan. That’s right, the insurance is not ensuring the homeowner’s loss. So why do they pay it?
Mortgage insurance was created to protect the lender in the event the borrower fails to make the payments and the loan is foreclosed. Any loan with less than 20% down is required to have PMI. The annual cost is divided into 12 monthly premiums and added tothe monthly mortgage payment.
Although it seems to be one-sided and only to the benefit of the lender, the existence of PMI along with other governmental regulations allows buyers that do not have a down payment of 20% or more to purchase a home. With the current home prices, most first-time home buyers would not be able to purchase a home with low down payment options(e.g. FHA 3.5% down program) if PMI did not exist.
Current regulations allow borrowers to remove PMI from their loan once their home’s value has increased sufficiently. To remove PMI, the borrower must have at least 20% equity in the home. A borrower may ask the lender to cancel PMI when the mortgage balance to 80% of the home’s original appraised value. When the balance drops to 78%, the mortgage servicer is required to eliminate PMI.
This extra monthly cost could be less painful if your tax accountant reviews your personal finances and determines you are able to deduct those premiums as interest on your returns. This deduction option applies to the 2015 and 2016 tax years but some homeowners may not qualify due to their income bracket or other considerations. Always consult with your tax accountant regarding any tax-related matters.
Lear more detailed information about FHA and PMI regulations and benefits here: http://www.fha.com/fha_requirements_mortgage_insurance
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