The US Government encourages its citizens to buy houses as they are ways to accumulate wealth. Significant tax credits and cuts are offered to home owners because of the mortgage that they have to pay on their loans. Usually, the amount payable as premium is 30% of a homeowner’s salary in a month.

Unlike some countries, the US allows its citizens to buy homes even if they cannot down pay a significant percentage of the amount from their own pocket. Buyers who take out a loan of more than 80% to buy homes mandatorily need to buy Private Mortgage Insurance or PMI. The scheme has been brought out to protect the lender in case the home buyer defaults on his loan repayments.

Some of the most pertinent facts about PMI are:

Even though the scheme aims to protect the lender in case of default, the cost of the plan needs to be borne by the loan taker.

The amount that needs to be paid towards the PMI is between $240 and $1,280, depending on the loan taken out and the state.

In case a loan taker defaults on his payments, the money accumulated in the PMI fund is used up to cover the costs of foreclosing.

The PMI is liable to be disengaged automatically once the equity share of the home owner in the cost of the house gets raised to 22%. A borrower can choose to disable the PMI when his equity share in the house rises to 20% of the mortgaged amount.

In 1999, it was decreed that the automatic disengagement of the PMI will hold in case of written documents. Moreover, the mortgage insurances provided by the FHA or Federal Housing Administration are not liable for automated termination.

The major difference between the insurance cover provided by the FHA and PMI is that the FHA continues for the entire lifetime of the loan. It is also more suitable for borrowers with bad credit history.

Even though the mortgage lender collects the premium from the borrower every month, he pays it to the PMI firm yearly. Therefore, once the policy is cancelled, there may be refunds between $250 and $1500. The payment is processed within 45 days of cancelling the policy.

In case of high risk loans, the PMI can be cancelled if the loan reaches half its life or 77% of the loan to value ratio, whichever arrives first, after the initial amortization payment schedule.

Even though the time frame for cancellation sounds easy to achieve, it may take 10 to 15 years on a 30 year mortgage to cancel PMI, unless borrowers make extra payment.

The mortgage lender needs to inform the borrower about the termination of the policy within 30 days of actual cancellation. Moreover, the mortgage holder has to issue to the borrower the terms of the PMI along with the phone numbers to contact in case of cancellation.

No fees can be charged by the mortgage holder for disclosing the information to the borrower.

Therefore, the PMI is mandatory for all interested families and individuals for home owning. It has been instated solely to protect the lender from potential default on the part of the borrower.