Private mortgage insurance or PMI as is known is a form of insurance new homeowners are required to purchase. This is particularly so if their down payment is 20 percent or less of the property’s valued price or sale price. The main reason for private mortgage insurance is to protect lenders in the case the new homeowner defaults on their home loan.
Although private mortgage insurance has a bad reputation since it only protects lenders, it is actually a good thing. Reason is it has allowed millions of people to be able to buy homes with smaller down payments. Previously, these people would not have been able to afford a home had the down payment remain the same. Another important reason is private mortgage insurance can help you qualify for home loans.
Cost of Private Mortgage Insurance
The cost actually varies depending on the mortgage loan and the monthly down payment. Usually, it is half a percent. To calculate your private mortgage insurance, you can use this estimated formula:
Annual private mortgage insurance = 100 – (percentage of down payment paid) * (sale price of house) * 0.05
Let’s take an example. Suppose you brought a $500,000 house. You pay a 20 per cent down payment. So using the formula as above:
Annual private mortgage insurance = (100 – 20) * $500000 * 0.005 = $2000
Your monthly mortgage insurance will be around $167.
One important point to note is you should always keep track of your payments and notify your lender when you have reached 80 percent equity of your house. Even though the Homeowner Protection Act requires lenders to notify you of how long it will take you to pay, it is still better to keep track of it yourself.
There are some cases where lenders make homeowners continue their private mortgage insurance all the way through the lifetime of the loan. This usually applies to high risk borrowers. Therefore your payment history and credit rating such as your FICO score plays an important part as well.
Some people hate paying private mortgage insurance for years. There are some ways around it.
One way is to pay more interest on your home loan. Some lenders will waive the private mortgage insurance requirement if you agree to pay a higher interest rate. Since mortgage interest is tax deductible, it can be a good idea to go ahead.
Another way to avoid paying private mortgage insurance is to prove to the lender that the value of your home has risen. If the value of your home has risen significantly, your home have already have the 20 percent or more equity you need to cancel the mortgage insurance. However, it does take time for the lender to verify your claim, sometimes as long as a year.
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Help answer the question about mortgage insurance
What's the difference between Mortgage Insurance/Hazard Insurance & Homeowner's Insurance?In my housing loan application it gives the breakdown of the principal mortgage payment, taxes, hazard insurance and mortgage insurance. What is the mortgage insurance? It's an additional $70 per month.
About Author
Dan Lim works in a finance company specialising in home loans consulting. Get more information, tools and resources on home loans, visit his site: http://about-homeloan.com
Article Source: ArticlesBase.com – What Is Private Mortgage Insurance?
Hi there!
Private Mortgage Insurance, or PMI, is insurance that protects the lender in case you default on your loan. With conventional loans, mortgage insurance is generally not required if you make a down payment of at least 20 percent of the home's purchase price. (Note, however, that FHA and VA loans have different insurance guidelines.)
Private mortgage insurance is generally included in your monthly mortgage payment and may be tax-deductible (double check with your tax advisor). Of course, lenders know that not every home buyer has the funds to provide a 20% down payment. That's why some lenders offer innovative loans designed to avoid costly private mortgage insurance.
To answer your second question, PMI is designed to protect the lender or the company servicing your loan in case the homeowner defaults. The reason PMI exists is exactly for the reason you mentioned… as insurance to the lender/servicer in case the homeowner is unable to manage the home loan payments any longer.
Hope this helps!
Thieves!