What Is Private Mortgage Insurance

What Is Private Mortgage Insurance

What is​ Private Mortgage Insurance?
Private mortgage insurance or​ PMI as​ is​ known is​ a​ form of​ insurance new homeowners are required to​ purchase .​
This is​ particularly so if​ their down payment is​ 20 percent or​ less of​ the​ property's valued price or​ sale price .​
The main reason for private mortgage insurance is​ to​ protect lenders in​ the​ case the​ new homeowner defaults on​ their home loan.
Although private mortgage insurance has a​ bad reputation since it​ only protects lenders,​ it​ is​ actually a​ good thing .​
Reason is​ it​ has allowed millions of​ people to​ be able to​ buy homes with smaller down payments .​
Previously,​ these people would not have been able to​ afford a​ home had the​ down payment remain the​ same .​
Another important reason is​ private mortgage insurance can help you​ qualify for home loans.
Cost of​ Private Mortgage Insurance
The cost actually varies depending on​ the​ mortgage loan and the​ monthly down payment .​
Usually,​ it​ is​ half a​ percent .​
To calculate your private mortgage insurance,​ you​ can use this estimated formula:
Annual private mortgage insurance = 100 - (percentage of​ down payment paid) * (sale price of​ house) * 0.05
Let's take an​ example .​
Suppose you​ brought a​ $500,​000 house .​
You pay a​ 20 per cent down payment .​
So using the​ formula as​ above:
Annual private mortgage insurance = (100 - 20) * $500000 * 0.005 = $2000
Your monthly mortgage insurance will be around $167.
One important point to​ note is​ you​ should always keep track of​ your payments and notify your lender when you​ have reached 80 percent equity of​ your house .​
Even though the​ Homeowner Protection Act requires lenders to​ notify you​ of​ how long it​ will take you​ to​ pay,​ it​ is​ still better to​ keep track of​ it​ yourself.
There are some cases where lenders make homeowners continue their private mortgage insurance all the​ way through the​ lifetime of​ the​ loan .​
This usually applies to​ high risk borrowers .​
Therefore your payment history and credit rating such as​ your FICO score plays an​ important part as​ well.
Some people hate paying private mortgage insurance for years .​
There are some ways around it.
One way is​ to​ pay more interest on​ your home loan .​
Some lenders will waive the​ private mortgage insurance requirement if​ you​ agree to​ pay a​ higher interest rate .​
Since mortgage interest is​ tax deductible,​ it​ can be a​ good idea to​ go ahead.
Another way to​ avoid paying private mortgage insurance is​ to​ prove to​ the​ lender that the​ value of​ your home has risen .​
If the​ value of​ your home has risen significantly,​ your home have already have the​ 20 percent or​ more equity you​ need to​ cancel the​ mortgage insurance .​
However,​ it​ does take time for the​ lender to​ verify your claim,​ sometimes as​ long as​ a​ year.

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