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The return of PMI

Many first-time home buyers are sitting on the sidelines of the U.S. housing market, hampering its ability to gain traction.
Many first-time home buyers are sitting on the sidelines of the U.S. housing market, hampering its ability to gain traction.

Until the housing/mortgage crisis of 2008, it was common when buyers had less than 20% down payment to be required by their lender to have private mortgage insurance, known as PMI.

The closer you were to the 20% down payment threshold, the less your PMI.

Private mortgage insurance (PMI) protects the lender in the event that you default on your mortgage payments and your house isn't worth enough to entirely repay the lender through a foreclosure sale.

If and when you refinanced down the road, and if the appraised value went up enough, the increase in equity would make the PMI disappear. Or if over time even without refinancing, it goes away, when an appraisal shows a substantial increase in value of the property.

Specifically when you've paid down your mortgage to 78% of the original loan, the law says that the lender must automatically cancel your PMI.

Because the pendulum has swung the other way, obtaining a mortgage is much stricter now, than it was in 2008 and prior at the beginning of that decade.

Back then even if you had less than 20% down, creative financing often was structured by way of a second mortgage, bypassing PMI.

Those days are gone, unless you are in the top percentile of credit scores and your income is verifiable.

Because the PMI amount is added to the total of your loan and paid off as part of your monthly mortgage repayments, it's an effective way of securing a home loan when you only have a small deposit. However, even though your loan is protected by PMI and you can borrow on a lower deposit, you will still have to meet all the statutory credit checks to ensure you can meet your mortgage repayments.

Private mortgage insurance does not give you additional homeowners insurance coverage, but it does give the bank insurance just in case you are unable (or unwilling) to continue your mortgage obligations.

Therefore PMI shouldn’t be thought of as a barrier to enter the housing market but rather, a tool that gets you a foot in the door, especially if you are a first time homebuyer.

The return of private mortgage insurance is actually a good thing for the overall housing market, and everyone will benefit in the long run, to avoid another mortgage debacle that occurred in 2008.

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