Private mortgage insurance, also known as PMI, is a type of insurance that all new homeowners must buy. This is especially true if their down payment is less than 20% of the value or sale price of the property. Private mortgage insurance is mostly there to protect the lender in case the new homeowner can't pay back the loan.
Private mortgage insurance has a bad name because it only protects the lender. However, it is a good thing. Because it has made it possible for millions of people to buy homes with less money down. If the down payment had stayed the same, these people would not have been able to buy a home before. Private mortgage insurance can help you get a loan to buy a home, which is another important reason.
How much mortgage insurance costs
The price actually changes based on the type of mortgage loan and the amount of the monthly down payment. Most of the time, it's half a percent. You can use this estimated formula to figure out how much private mortgage insurance you need:
Annual private mortgage insurance = 100 - (percent of down payment paid) * (sale price of house) * 0.05
Take a look at an example. Let's say you bought a house for $500,000. You pay a 20 per cent down payment. So, using the above formula:
Annual private mortgage insurance = (100 - 20) * $500000 * 0.005 = $2000
Your mortgage insurance will cost about $167 per month.
One important thing to remember is that you should always keep track of your payments and let your lender know when your house is worth 80% of what you owe on it. Even though the Homeowner Protection Act says that lenders have to tell you how long it will take you to pay, it is still best to keep track of it yourself.
In some cases, lenders require homeowners to keep paying for private mortgage insurance for the whole length of the loan. This is usually true for borrowers with a high risk. Because of this, your payment history and credit score, such as your FICO score, are also very important.
Some people hate having to pay private mortgage insurance for years. You can get around it in a few ways.
You could pay more interest on your home loan, for example. If you agree to pay a higher interest rate, some lenders will let you avoid getting private mortgage insurance. Since mortgage interest can be deducted from your taxes, it might be a good idea to go ahead.
You can also avoid paying private mortgage insurance by showing the lender that your home's value has gone up. If your home's value has gone up a lot, it may already have the 20% equity you need to stop paying for mortgage insurance. But it takes time for the lender to check your claim. Sometimes it can take up to a year.
