Once a home has been purchased and you go to closing you may be required to purchase private mortgage insurance (PMI) . This insurance is payable to a lender and is specifically to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.
PMI insurance protects the lender, not the homeowner and it is typically required by lenders due to the higher level of default risk that's associated with low down payment loans. This type of insurance is usually only required if the downpayment is less than 20% of the sales price or appraised value (in other words, if the loan-to-value ratio (LTV) is 80% or more)
The cost of PMI premiums vary, but typically they fall between one-half and one percent of the loan amount, depending on the size of the down payment and loan specifics. These costs are in addition to your mortgage payment and not usually tax deductible. The PMI may be payable up front, or it may be capitalized onto the loan.
Many homebuyers want to know how long they will be required to have this insurance. If you are currently paying PMI, you will need to continue paying your premiums until you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less.
You have another option where the lender will automatically cancel the payments but they wont do this until you 22% equity in the home rather than 20%. Keep in mind you do have the right to cancel PMI at the 20% mark a lender won't automatically cancel it for another 2 percent