What is Mortgage Insurance?

Learn why some loans may have additional insurance.

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Mortgage Insurance (MI), also known as Private Mortgage Insurance (PMI), is aimed at protecting the lender, not the home buyer. It basically offers a degree of protection for the lender against non-payment in the even the home buyer defaults on the home loan. PMI allows for a lender to provide a home buyer with a home loan with a small down payment (e.g. less than 20% down).

PMI isn’t permanent. When a mortgage falls below an 80/20 Loan-to-Value (LTV) ratio, it can eliminate the need for PMI. Below are a few ways PMI can be removed from a loan, thus reducing the monthly mortgage payment.

Mortgage Reduction

Applying payments to the principal to reduce the LTV ratio below 80/20 is one method to eliminate PMI from the monthly mortgage payment.

Appraisal

If the value of the home has improved, the increase in equity can drop the LTV ratio below 80/20. However, an appraisal can cost approximately $450. This is an option that you’ll want to consider when the market has improved enough.

Automatic Termination

Over a period of time as monthly payments are made on the home, the equity can eventually fall below the 80/20 ratio on its own. This will result in the PMI automatically terminating from the home loan. We recommend consulting with your lender on ways your PMI can be removed from your home loan.