The Basics of Private Mortgage Insurance
By Sadiya Anjum
Buying a house has never been easier. With little down payment required, more people are becoming proud homeowners. Many of these people are unable to make a down payment of 20% which is usually required to obtain a mortgage. But the rules have changed and loans can be obtained with a down payment as little as 3%. As all excessively good deals go, there is a catch here too and it is called PMI.
Private Mortgage Insurance (PMI) is basically an insurance that a borrower maybe required to take out if he puts down less than 20% as down payment or borrows more than 80%. This insurance will guarantee the outstanding mortgage to the lender in case the borrower defaults. With low down payments, lenders need reassurance that the loan will be repaid. So a PMI is taken out; you pay the premiums and the lender is assured that he will be repaid one way or another. A PMI is not compulsory and the lender cannot add it to the loan unless the borrower is a loan risk and is informed about it in advance.
With Private Mortgage Insurance, you are required to make an initial down payment and consequently premiums on a monthly basis. Generally, you are required to pay the first yearís premium on the closing day. The premium amount is usually about 0.5% of the total loan value. But as you pay off your loan, your premium amount will also decrease as it is calculated on the amount you still owe on your mortgage. But you do not have to pay the premiums till you clear your loan completely. You can cancel your PMI when you clear about 80% of the original purchase price or the appraised value of your home when you bought it. This is provided you fulfill other terms included in the PMI such as no late payments in the year before cancellation, no other mortgages against your property etc.
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Since the PMI actually favors the lender, it is best if you can avoid getting stuck with it. PMI is not tax deductible and is expensive, thereby leaving a dent in your pocket. On the other hand, PMI does have its own benefits when you apply for a mortgage. If you have little or no money for down payment, a PMI may still actually help you secure that loan. Usually mortgages with low down payments have high interest rates as the borrower is considered to be a loan risk. With PMI, your interest rates on the mortgage itself may not be high as the lender is assured of his money from another source if you default.
Private Mortgage Insurance has just made it easier to secure a loan. Many people especially young couples have been able to buy their first homes even if they cannot afford a huge down payment. So right in the beginning, a PMI will ensure that you can get a loan easily and quickly. But in the long run it is just not beneficial to you as a borrower. But every privilege has its price. You pay in the long run but get a roof over your head now.
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