Many a first-time homebuyer has grumbled about paying private mortgage insurance. This article discusses the particulars of private mortgage insurance, also known as “PMI.”
Private Mortgage Insurance
Unless they owners are insane, every business in the United States carries some form of insurance to protect against losses. The various lending institutions that issue home loans, equity lines and refinances to borrowers are no different. The insurance they carry is private mortgage insurance.
Private mortgage insurance protects a lending institution from losses if you default on your loan and a home goes into foreclosure. Essentially, the lending institution is going to be covered for any shortages between the cost of liquidating the home and the amount of the loan. This is of particular importance to a lender when the housing market pulls back from high valuations. In such a pull back, it is not uncommon to see the total mortgage balance exceed the value of the home. Obviously, this makes lenders uncomfortable.
PMI – Premiums
Most homeowners can wrap their minds around the need for private mortgage insurance. The grumbling starts, however, when they find out who has to pay for the insurance. Yep, the homeowner is on the hook. As the homeowner, you are paying for insurance that will protect the lender if you default. While this may not seem fair, keep in mind the lender is giving you a rather sizable chunk of money. If you are still grumbling, there is a way to avoid paying mortgage insurance.
20 Percent Down
If you take out a home loan, the 20 percent figure will come front and center in your mind. Why? 20 percent is a magic figure in the world of home loans and mortgages. If you make a down payment of 20 percent, you are not required to obtain or pay for private mortgage insurance. With PMI premiums running $1,000 or more a year, it makes sense to pay 20 percent as a down payment if at all possible.
What if you can’t scrape together 20 percent of the home value for the down payment? Well, you’re stuck paying PMI, but not forever. Once your equity in the home reaches 20 percent of the valuation, you can cancel the PMI. Keep a close on your equity as lending institutions are under no duty to tell you when the magic 20 percent figure is reached. Oddly, they almost never seem to remember!
Private mortgage insurance is expensive, but you can avoid it with a sizeable deposit. If you can’t come up with that chunk of change, try to keep in mind the beautiful home and investment the loan let you acquire.