Question:

How much the PMI (private mortgage insurance) company pays the lender if the borrower defaults?

Answer:

Anytime the borrower puts less than 20% towards the down payment, they will need to buy mortgage insurance. If they are not buying it from FHA, they will have to turn to a private mortgage insurance company for the PMI. If you are going to put 10%, the insurer will pay another 10% to the lender should you default on payment. If you put 5% on down payment, the insurer will pay the lender 15% in case something goes wrong with the loan.

Is PMI forever?

Many people do not know they have the right to cancel PMI when they reach 20% equity in their home. Some time ago people would be charged by the insurance company forever, even for the whole duration of the loan. Now loan providers are required to automatically cancel private mortgage insurance if the borrower reaches 22% home equity. However, if you reach 20%, you can demand that the lender discontinues to charge you PMI monthly premiums.

Do not expect, though, that your PMI will always be cancelled automatically. FHA and VA loans do not cancel mortgage insurance when you reach 20% equity. If you are not insured with them but you have late payments or are considered a risky borrower, the private insurer may also not cancel your PMI when you've built up equity.

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