YOU ASK:

What is private mortgage insurance (PMI)?

WE ANSWER:

Private Mortgage Insurance or PMI is an insurance product that aims to protect lenders from bad borrowers, or borrowers that are unable to keep up with the monthly mortgage payments.

When a buyer of a house wants to secure a mortgage or a loan to fund the purchase, he is required to take out private mortgage insurance. This is when the down payment he is able to pay is less than 20% of the purchase price of the house.

When the borrower defaults on his loan, the insurer will file a claim from the insurance company. The insurance company will pay for the remaining balance of the loan.

The PMI works to the advantage of both the lender and the buyer. It enables the buyer to purchase the home for a small down payment. At the same time, it protects the lender against loss in case of the borrower's default.

Under the Homeowner's Protection Act of 1998, you, as the buyer, can expect regular disclosures from your lender with respect to the loan's PMI coverage.

The bank is required to disclose certain information at specified times:

  • Upon loan closing, the bank should let you know about your right to request the cancellation of the PMI. It should also let you know when this cancellation can happen. Aside from this, the bank should also let you know that the PMI will automatically be cancelled (when the loan amount reaches 78%), as well as the exemptions, if any, with regards to the automatic termination or request for cancellation. The bank should also provide a written initial amortization schedule for loans that are on a fixed-rate basis.
  • Every year, the bank should provide updates as to the amount of the loan, as well as a statement as to who you can contact to determine whether you can already request for cancelation of the PMI.
When the PMI is canceled or terminated, the bank should also notify you that you don't need to pay premiums on it.
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