We need insurance for our lives, cars, homes, health, and in some cases, even our mortgages. Private Mortgage Insurance (PMI) is the industry term for insurance that protects the lender of your mortgage against any kind of default. It's mostly used when your down payment is less than 20% of the price of the home.
Every month, you will have to pay a premium that is based on how much your down payment is and how much your loan is in total. Most of the time, the payment is about 0.5 percent of the total loan value. Most of the time, these payments are added to your mortgage payment to make them easier to track and pay.
The good news about PMI is that if you have to get it, you don't have to keep it for the whole loan term. Most mortgage lenders will stop charging you for PMI insurance when you have paid down 20% of the loan amount. By law, they have to stop when the total amount you still owe on the loan is 78 percent of the amount you borrowed in the first place. Most homeowners will see their monthly payments drop by $37 to $50 because of this.
You should know that if your loan is considered "high risk," lenders can legally make you keep PMI insurance until you have built up 50% equity. Usually, these loans are given to people who took out loans but didn't have enough proof of their income or who have a spotty credit history. The best way to find out how long you will have to pay PMI is to talk to the company that gave you your mortgage. When you sign the paperwork for your mortgage, they should tell you when you won't have to pay PMI anymore.
Of course, the best thing you can do financially is to never have to pay PMI. You can avoid having to pay this by getting a higher interest rate (usually between.75 and 1 full point) or by getting two mortgages to buy a home, with one covering 90% of the price and the other 10%. You need to carefully look at the numbers for both of these options to see if they will save you money over the life of the loan. A one percent increase in interest can add up to a lot of extra interest payments over the life of the loan, which may be much more than what you would pay for PMI insurance.
If you really want to win the mortgage game, you should have a 20 percent down payment and make sure your credit report is as clean as you can get it. Both of these things take time, but if you save money and work on your credit for a few years, you can make great progress toward your goal of buying a house.
