Question:

Private Mortgage Insurance (PMI) Definition

Answer:

Private mortgage insurance is the insurance required by borrowers with less than 80% LTV. That is, when the down payment is less than 20%, borrowers are required to purchase mortgage insurance. If the loan is not FHA insured, the insurance is purchased from a commercial insurer and will be called private mortgage insurance or PMI.

Private mortgage insurance will also be required when refinancing with more than 80 percent of the appraised property value.

PMI has become tax-deductible on a large scale for loans signed in 2007 and a single mortgage with a PMI is highly competitive now towards the 80/20 or 80/10/10 piggyback loans, or combos, people used to sign for to avoid paying a PMI. However, whether PMI will continue to be tax-deductible after 2007, is yet to be seen.

As per HPA (Homeowners Protection Act of 1998), you can request dropping PMI payments once you reach 20 percent equity in your home; lenders are required to cancel automatically your private mortgage insurance when 77-78 percent LTV is reached. This is possible if you are current with the loan and have been less than 60 days late with payments for the previous two years.

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