Who Needs to Take PMI on Their Home

Kevin McCormally: I am Kevin McCormally of Kiplinger's, I am here with Pat Esswein, Associate Editor of Kiplinger's Personal Finance magazine to talk about Private Mortgage Insurance. Pat, let's jump right in the alphabet soup, what is PMI? Pat Esswein: PMI stands for Private Mortgage Insurance, and strangely enough, it doesn't protect you, it protects your lender. Kevin McCormally: Who has to buy it? Pat Esswein: You do, if you put down less than 20 % on the value of your home when you buy it. Kevin McCormally: So by down payment is less than 20 %, I have to buy this special insurance to protect the lender. Pat Esswein: Exactly, it protects. The idea is that it protects the lender in the event that you -- mis-payments or an ultimately default on your loan. Kevin McCormally: So if they can't sale the house for as much as I owe them. This insurance would kit them and pay the difference. Pat Esswein: Exactly. Kevin McCormally: How much is PMI cost? Pat Esswein: Probably about no more than 1 % of the amount of your loan. Kevin McCormally: So if I got a $100,000 mortgage is a $1000 a year. Pat Esswein: About that, yes. Kevin McCormally: Is there any way I can get r id of PMI after I start paying and when can I stop? Pat Esswein: When your equity in the home reaches about 22 % of the loan value, by law, the lender has to cancel the private mortgage insurance and then you don't have to pay for that anymore, however you can ask the lender to drop it when your equity reaches 20 %. Kevin McCormally: Okay how do I prove that my equity is 20 or 22 % of the home value? I mean how do I know that? Pat Esswein: Well, if you reach 20, that 20 % amount by simply paying down the amount of principal and the mortgage, that's very clear. If you reach the 20 % based on appreciation and the value of the home, you may have to prove that by paying for an appraisal. Kevin McCormally: Okay, but I paid for the appraisal shows that I have at least 22% equity, and this extra charge disappear? Pat Esswein: Right, the burden is on you until you hit that 22% mark. Kevin McCormally: Okay, thank you very much.