What Is Private Mortgage Insurance?
If you want to buy a home, but don’t have quite enough money for a down payment, you will most likely need to buy private mortgage insurance (PMI.) This type of insurance, also known as LMI, or lenders mortgage insurance, will reimburse the person making the loan if you aren’t able to continue making your mortgage payments. Usually PMI is required if the borrower doesn’t have at least 20% of the sale price to use as a down payment. Following are a few insights into private mortgage insurance.
Protection for the Lender
A dream of most people growing up is to own a home. Unfortunately, it takes a lot of money to buy one, so the majority of home buyers are forced to borrow the money, or at least most of it, in order to become a home owner. Lending institutions, such as banks and credit unions, are in the business of providing the funds which enable people to own a home. If the person borrowing the money can’t come up with at least 20% of the purchase price as a down payment, which is pretty much standard within the home buying marketplace, then they are required–at least in most instances–to purchase private mortgage insurance, which protects the lender in the event the buyer defaults on the loan.
PMI–Good or Bad?
In most cases, private mortgage insurance is considered to be a bad thing because it only protects the lender, and not the homeowner. The person taking out the loan has to buy insurance that they know they’ll never receive a dime from. If the insurance is used at all, it will be the lender who benefits. The other side of the coin is that without private mortgage insurance, a lot of people who would like to buy a home wouldn’t be able to, because they don’t have enough money on hand to make a down payment. As a result, the real estate market thrives because people buy homes, and the only way most of them are able to do so is to purchase private mortgage insurance.
What It Costs
Typically, private mortgage insurance costs vary from lender to lender, and also by the amount of money you put down. Overall it is approximately 1% of the mortgage price per year. So if you paid $250,000 for your home and put 10% of the sale price down, your mortgage would be $225,000. Private mortgage insurance would be 1% of that, or $2,225 per year, or about $185 per month.
How Long Do PMI Payments Last?
In most cases, you must pay down to 80% of the home’s value before private mortgage insurance can be stopped–it is required by law through the Homeowner Protection Act, passed in 1998, for lenders to notify the borrower when they reach that point. However, if you’re deemed to be a high risk borrower–meaning you’ve consistently been late or don’t make payments–you could be required to continue paying for private mortgage insurance. In extreme cases a borrower may be required to pay until the 50% range. It would be a good idea to keep track of how much you’ve paid on your home to make sure the private mortgage insurance is canceled at the proper time.
Can You Avoid Private Mortgage Insurance?
The short answer is yes, but there are caveats. The only way to avoid having to pay for private mortgage insurance is to take out a loan on top of the first loan, i.e. a second mortgage, or to agree to a higher interest rate on your initial mortgage. You would have to ask your lender for details on the possibility of not having to take out private mortgage insurance. You may also want to talk to a tax attorney or your accountant to find out whether or not you can save money this way, because there may be some tax advantages to these methods. Another way to have your private mortgage insurance canceled is to prove to the lender that your home has increased in value, which could mean you’ve already reached the 20% figure needed to have your payments terminated.
Guest post from Casey Lynch. Casey writes about home insurance and home insurance quotes for HomeInsurance.org.
