It's long been one of the crummiest deals around: private mortgage insurance, or PMI. Now, thanks to a federal law that took effect July 29, homeowners have a better chance of breaking free of this annoying cost.
PMI is insurance to protect the mortgage lender from loss if the borrower defaults on the loan. Typically, it's required whenever a loan represents more than 80 percent of the property's value. Borrow $90,000 to buy a $100,000 home, you'll probably pay PMI. Borrow $80,000 or less, you probably won't.
PMI charges are folded into the monthly mortgage payment, typically costing about 0.5 percent of the loan amount. So if you borrowed $100,000, you might pay $500 a year, or about $42 a month. That could add up to $15,000 over the 30-year life of a loan. If you could forgo the PMI payment and invest $42 a month at 8 percent for three decades, you'd end up with nearly $60,000. So PMI is not, by any means, a small, incidental cost.
Of course, no one should have to pay PMI for 30 years. To the extent there is a legitimate case for PMI -- not a very …