Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is an added payment that a homeowner makes to a lender as a result of not having 20% equity in the property. Rates average about $55 per $100,000 borrowed and the reason for the payment is to insure the lender in the event that the loan is defaulted on. Knowing this, some homeowners mistakenly think that they will always have to make this payment. There are two popular ways to reduce a monthly mortgage payment and both deal with equity.

  1. Paying Down the Balance on the Loan
    If someone purchases a $200,000 home with no money down (VA loans excluded) they will be paying PMI in addition to the normal payments toward principal and escrow until they achieve $40,000 in equity.This can be done quickly by adding to the principle payments each month.
  2. Property Appreciation
    If the $200,000 home noted above went up in value to $240,000 and the homeowner had $8,000 in equity, then there would be a total equity of $48,000, equaling 20%. When eliminating PMI payments, it’s important to note that you should contact your lender to make sure it goes away when it should.