Private Mortgage Insurance, or PMI, can cause negative feelings in some people. After all, PMI’s primary purpose is to protect the lender in case you cannot make your mortgage payments, but the PMI causes you to pay extra money each month to the lender. Even though most people believe that the PMI will only benefit the lender, it is important to look at all the facts and information. Especially since the PMI can in fact benefit you, the borrower, as well.
Basics of PMI
PMI, short for Private Mortgage Insurance, is an extra insurance that some lenders require from many borrowers. This insurance is mainly required if the loan is worth more than 80% of the new home’s value. If the borrower cannot pay at least 20% in the form of a down payment, PMI is typically required by the lender. The PMI lasts throughout the duration term of the loan unless it is cancelled, so the PMI can be seen as a mortgage term life insurance since it lasts the life of the loan.
Unlike many types of insurance that you may take out, PMI protects the lender, and only the lender. The borrower pays premiums to protect your lender in the event that you fail to fulfill your duties of paying off the mortgage loan. The PMI is based on the loan amount and the down payment, so two people—even with varying credit scores—can pay the same PMI if their loan and down payment amounts are the same.
The mortgage insurance premiums vary, but are often between 0.5 and 1% of the total loan amount. If you need a loan of $250,000 to purchase a new home and can pay a down payment of $20,000, your premium would average $1500. If you budget your income and expenses monthly, this would be an addition of $125 per month on top of your mortgage payment. There are many mortgage insurance calculators available via the Internet to calculate these expenses for you if you do not remember how to calculate the premium.
You also would need to budget in the mortgage insurance rates each month. PMI mortgage insurance rates are paid monthly, in addition to the principal and the interest on the mortgage loan. Many lenders provide various ways of paying the insurance rates, so it is important to discuss these options with your lender.
Benefits of PMI
The PMI is often referred to as mortgage payment protection insurance. It protects the lender against loss if the borrower defaults on the loan. Since most mortgage loans do not require the property as pledged collateral, the lender risks losing out on their money if you as the borrower cannot fulfill the payments of the loan. This extra insurance assures that you can purchase a home without having a lot of money set aside to pay a large down payment.
This is actually the only benefit for you: a lower down payment for your mortgage. Although this may seem like a huge deal for just one benefit for you, but you need to keep in mind that instead of having to afford a huge down payment, you will be able to purchase a home with only a small percentage of the down payment.
For example, if the house you want to purchase is $200,000, a 20% down payment is $40,000. This is the least you can pay without having to purchase the PMI, and $40,000 is a large sum of money to set aside and save. If you opt for PMI, you can put down a down payment of only 3%, or only $6,000.
This will help you purchase a home sooner. If you could only set aside $3,000 a year for your down payment, purchasing PMI could help you purchase your home within two years, instead of seven years if you did not take out the PMI and had to pay the 20% minimum down payment.
Facts of PMI
In order to get the PMI, you often have to seek out an insurance agent. These agents check with lenders to find qualified mortgage insurance leads. Once you are qualified, a form is filled out on the insurance lead provider’s website. The insurance agent scopes these websites and contacts the lead about the anticipated insurance coverage for the PMI.
Not all mortgage loans require PMI. In fact, if you opt for an FHA (Federal Housing Administration) loan, you do not need to have PMI. FHA mortgage insurance is backed by the government’s guarantee. You, the borrower, pay that guarantee by either paying a premium at closing or a monthly mortgage insurance premium with your monthly mortgage payments.
Although in most cases, taking out private mortgage insurance is not always avoidable and it only seems to benefit the lender, the main benefit for the borrower is a huge one. You will be able to afford a house sooner thanks to PMI than you would have if you had to wait for your savings to reach the 20% down payment. Work with your lender to get the PMI, and you will be on your way to a new home.