Mortgage insurance, commonly known to borrowers as PMI, is an insurance policy that protects the lender moreso than the borrower, in the event of a default.

In the typical mortgage lending market any borrower who is paying less than 20% of the purchase price of the real estate up front will be required by the lender to carry PMI insurance. What this says is "we'll lend you the money, your credit is acceptable to us, but we're not so comfortable with the fact that you have very little to lose if this goes south."

PMI insurance was one of the factors that drove the superheated real estate market beginning in the early 90's and lasting through 2006 in most areas. The zero-down payment realty deals were not possible in the 70's and 80's. Simply put, without the protection that PMI brought to the market, most lenders were not willing to risk borrowing more than 80% on real estate deals - too easy for the buyer/borrower to walk away with limited losses, leaving the lender holding the bag.

What is the value of PMI? Well, to you as the borrower, the value is very little, and the cost is very high. Depending on the loan and your credit, area, type of real estate, etc. PMI can account for approximately 25% of the monthly payment (typically escrowed by the lender). That means on a monthly loan service of $750.00 you'll be paying an additional $250.00.

What do you get for $250 per month? Absolutely nothing. There is no upside for the borrower. It is protection for the lender -they are the only ones who can collect on PMI.

If you have taken a loan and are required to carry PMI, a good way to reduce your monthly expenses (or pay down the principle faster) is to eliminate the PMI. Once the value of your real property reaches the point at which the principal on the loan is less than 80% of the property's value, PMI is no longer required.

The lender won't tell you when this occurs. There are two ways you can reach that 80% ratio: first, by paying down the principal, eventually you reach the point where the loan principal is no longer greater than 80% of the purchase price.

The second method speeds the process along - that is value appreciation - the property value has increased simply due to the market and inflation. To capitalize on property value appreciation to eliminate PMI insurance you will need to have an appraisal done on the property. This may cost between $250 and $400, but, keep in mind that if you eliminate the PMI, you will eliminate the additional payment of $ for the lenders benefit every month. (In the example of a $1000/mo. mortgage and PMI payment, the appraisal fee is paid for within the first two months wihtout PMI).

Learn more about this author, K D Grey.
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