Why Do I Need Private Mortgage Insurance?
By Stacy WilliamsExplanation of private mortgage insurance and why you may need it for your home loan.
Purchasing a new home requires you to save a large amount of money for a down payment. If you are unable to come up with 20% down, you can still take a loan, but will be required by lenders to take on private mortgage insurance (PMI). Private mortgage insurance protects your lender in the case that you default on your loan.
Benefits of PMI
As a borrower, PMI allows you to take out a larger loan with little to no money down. Lenders will allow a 3% to 5% down payment when PMI is in place. You’re best interest is to put 10% down, but this is not a requirement.
Private mortgage insurance also protects your lender. If you are unable to pay your loan, this limits the losses taken on by the bank.
The Process of PMI
PMI is calculated depending upon the size of loan you take on. The more money you put down, the less your PMI payment. Typically PMI is .5% to 1% of your loan amount.
If you place 10% down on a $150,000 mortgage, your PMI is calculated on the remaining 90%. Thus, your $135,000 loan will be multiplied by .5%, making your annual PMI payment $675. Your monthly payment is then roughly $56 in addition to your mortgage payment.
Canceling private mortgage insurance
A lender is required to tell you when your loan is paid down to less than 80% of the value. Once you have reached this percentage, you can cancel your PMI. You can also cancel your PMI if the value of your home increases to more than 80% of the loan. You must notify your lender when you are ready to cancel your mortgage insurance premium.
Related posts:
- What Is 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?