Mortgage Insurance: What happens if a borrower defaults?

For some prospective homeowners, PMI is the best or even the only option for purchasing a home. Depending on which tax bracket you fall into, you may even be able to deduct your PMI from your tax returns. Some lenders also allow the PMI to be paid upfront rather than each month; others offer discounts for paying upfront or apply the one-time upfront fee to the outstanding loan balance so that it is amortized over the loan term.  

Once you have built up at least 20% equity in your home, you should be able to cancel the PMI by submitting the proper paperwork and having the home formally appraised, although some lenders will require that PMI be paid for a fixed period of time. Also, if you are pursuing home refinance options and your home’s value has appreciated, you may be able to cancel your PMI.

If PMI payments in addition to a monthly mortgage payment exceed your budget, it’s best to either save up until you can afford at least a 20% down payment or use what’s known as a piggyback mortgage. A piggyback mortgage splits the total home cost into three parts: one large loan (about 80%), one small loan (10% to 15%), and one small down payment (5% to 10%). These loans are also called 80/10/10 mortgages, and similar variations thereof. Be careful with piggyback mortgages, however, as they may contain riskier terms and higher interest rates than a standard mortgage. Also, if your home’s value depreciates, a piggyback mortgage could make it difficult to pursue mortgage refinance options in the future.

Whether you are taking out a first mortgage or refinancing a mortgage again, Home Mortgage HQ is your free, comprehensive source of mortgage-related information.