What Is Private Mortgage Insurance?
By Kevin LandisAdvice to help you understand whether you need private mortgage insurance.
If you take out a home loan and cannot put 20% down, the lender will require you to take out private mortgage insurance (PMI). PMI is an extra insurance required by lenders for loans costing more that 80% of the LTV.
PMI Benefits
Private mortgage insurance protects lenders against profit loss if you as a borrow default on your loan. As a borrower, PMI allows you to purchase a home with less cash on hand. You can buy a home with as little as 3% to 5% without spending years trying to save for a huge down payment.
Calculation
Your PMI amount varies depending on how much you put down on your home. The Mortgage Bankers Association states the average private mortgage insurance rate is 0.5% to 1% of your loan amount.
If you put 10%, or $20,000, down on a $200,000 home, the lender will calculate the remaining 90%, or $180,000, by .05 to get your PMI. Your annual private mortgage insurance will cost you $900. Divide this by 12 months, and you add $75 to your monthly mortgage.
Tips
Once your LTV reaches below 80%, you can drop your private mortgage insurance. If you think the value of your home will increase quickly upon closing your home, this works greatly to your advantage. Lenders must tell you how long it will take for you to pay down your loan to less than 80%.
Avoid private mortgage insurance
You don’t have to pay 20% down to avoid PMI. Taking out an 80-10-10 loan, where you put down 10% and take out a second mortgage for 10%. You can also request a higher interest rate fro your lender. this rate increase ranges from .75% to 1% of the original rate.
Related posts:
- Why Do I Need Private Mortgage Insurance?
- How can I terminate my private mortgage insurance?
- Does Private Mortgage Insurance Offer Any Tax Advantage?
- What Type Of Insurance Do I Need When Getting A Home Mortgage?
- How Much Does Mortgage Loan Insurance Cost?
