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What is PMI Insurance? by Marilyn Katz Just what is private mortgage insurance (PMI)? This is a product that lenders often require in order to accept a loan. It protect the lender, and not the borrower, in case the borrower defaults on their loan. It will not take away that borrowers responsibility for a loan, and it will not protect credit if a loan goes into default. Lenders usually will not qualify borrowers with less than a 20% down payment unless they purchase PMI. To be fair to loan companies, they are taking a lot more risk when they lend to people who do not have twenty percent to put down. The borrower is taking less of the risk of the home purchase, and he or she is putting more into the lap of a mortgage company. Many factors may prevent them from getting the full purchase price of a home back if a borrower defaults. In addition, the type of borrower who can come up with a larger down payment may have more resources. Those people will be less likely to stop paying. PMI is not always evil. Lots of people take this coverage in order to qualify for a loan. It is not always a bad option. Sometimes it may be the only way to qualify for a mortgage on a home that makes sense to buy. If your family income is under the IRS guidelines, PMI may provide a tax deduction. So the actual cost of this coverage will not be as much as the premium. You need to consider these factors when you sit down and figure out if a certain loan and home purchase is the right one for you. But there are lots of reasons to avoid private mortgage insurance if you can. Cost is the biggest reason to look for another option. The premium could be about 1% of your loan per year. This is simple to illustrate. For every $100,000 of your loan, you can pay $1,000 a year for PMI. So if you consider monthly payments,. This is about an extra $80 added to your home payments. For a $250,000 loan, this is about $200 a month. This is a real cost that must be added to your cost of home ownership! Look at how much harder it will be to budget for mortgage payments if you have to pay a couple more hundred dollars a month. And of course, these payments mean that less of your check actually goes towards building up your equity. So it can take you longer to ever get to that 20% equity point where you can cancel the PMI! But we understand that it can be a good decision, for some people, to buy a home even if they do not have 20% to put down. But you really need to look at your own individual situation. We have certainly seen that a lot of people lost their homes because they did not understand the real costs of homeownership. You loan payments, PMI, homeowners insurance, etc. are only the beginning. Now you will also be responsible for upkeep and repairs. And if your situation changes, you may need to sell your home quickly. If you do not have much equity in your house, it can be a lot harder. We can give you some ways to avoid pmi. If you are buying a home, or if you already own one, look at our homeowners insurance calculator.

 

 

 

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