Significance

• Equity is the percentage of a home owned free and clear, without any debt tied to it. When a borrower places a down payment on a home, the percentage of the down payment versus the sales price is calculated as the equity. In the event of the refinance, the appraised value minus the mortgage debt owed is the equity. If the equity in the property is less than 20 percent, PMI fees are charged to the borrower.
  
  

Function

• It is in the borrower's best interest to have the PMI removed as soon as possible. This can be accomplished by extra payments or by getting a new appraisal once the market value of the property rises. Once the borrower has proof that the equity in the property is at least 20 percent, he can contact the lender and ask for the fee to be removed. With the proof in payments or appraised value, the lender is required to remove it from the debt.
  
  

Types

• There are two ways a borrower can pay PMI, in a lump sum upfront payment or in monthly installments. Once the PMI debt is paid in full through principle reducing payments, the fee is removed automatically by the borrower. However, if the upfront payment option was made, there is no refund if the borrower's house value rises faster than anticipated.
  
  

Considerations

• Some lenders have additional stipulations on PMI, such as a set time period that the fee must be paid. Some lenders require that PMI be paid for a minimum of three to five years, depending upon the mortgage program chosen. Additionally, some lenders require 22 percent equity in the property as opposed to 20 percent.
  
  

Misconceptions

• FHA loans, as opposed to conventional loans, require PMI the first five years of the debt regardless of down payment. If a borrower chooses a FHA mortgage loan, he must pay PMI even if he has a down payment of more than 20 percent.