What Is Private Mortgage Insurance and What Does It Mean for You?
Private mortgage insurance, known as PMI, is an insurance that lenders require borrowers to take out if they are borrowing more than 80% of the value of their new home. Decades ago, most people would not think about buying a house without 20% down. However, times do change. Many people come to the table with 3% to 10% in a down payment. The more a lender gives to a borrower on the value of a home, the more risk there is to the lender. To counteract that, many lenders require these borrowers to carry PMI insurance in addition to making their mortgage payments. The insurance gives the lender protection in case the borrower defaults.
If you want to get a mortgage on a home worth $200,000, to avoid paying private mortgage insurance, you need a down payment of 20% or $40,000. For some people, that is a very high figure. It means they may have to put off getting a home for several years or they take the plunge and pay the PMI. In the past, many have avoided PMI by taking a second mortgage out to cover the additional gap between the actual down payment and the 20% mark. However, in 2007, PMI became partially tax deductible. This made PMI a more attractive option.
How do the banks determine the amount of private mortgage insurance you pay each month? The calculations are difficult to explain. It requires taking the amount of your mortgage and dividing by a certain number associated with the amount you put down. If you brought 5% down, you can expect to pay about $65 per $100,000 you have on your mortgage. So for a $200,000 mortgage, you can expect to pay about $130 per month for PMI. The number can vary and changes over the life of your loan. As you build equity in your home, the amount goes down.
One thing you need to watch when it comes to PMI is equity. If your home appreciates to where your mortgage amount is less than 78% of the current value of your home, you may no longer have to pay private mortgage insurance. You need to have your mortgage current and the loan cannot be a VA or FHA loan. High-risk loans may require carrying PMI for a longer period. But, you can use PMI if you find the home of your dreams but do not have 20% for a down payment. (more…)