Thursday, August 27, 2015 / by Matt Chase
In last week’s blog, which can be read here, I discussed how to save for down payment. What happens if you don’t have enough money for a large down payment but find a great home buying opportunity? This is where Private Mortgage Insurance, or PMI, comes in.
Essentially if your down payment is less than twenty percent, you will be paying for private mortgage insurance. But what is private mortgage insurance? Basically, PMI reimburses the lender if you default on your home loan. Being the borrower, you pay the premium for this service. The amount you pay is typically based on the size of your down payment, and your credit score. This is typically around 0.3 percent to 1.5 percent of the original loan amount per year. Most policies require the borrower to pay monthly.
Your lender must automatically cancel the private mortgage insurance when the outstanding loan balance drops to 78 percent of the homes original value. If you’re feeling extra diligent you can speed the cancellation process up once your loan value reaches 80 percent. This can be done by keeping track of the payments you make and then asking the lender to discontinue the mortgage insurance premium. This option does have the reputation of being hard to do, and not being an easy process.
To sum everything up, there are obviously disadvantages and advantages of participating in private mortgage insurance. Disadvantages mostly have to deal with the extra cost. When you have to have PMI, make sure you understand how it works, what you will have to pay, and the requirements for it to stop. The advantages include being able to buy a home in an otherwise missed opportunity if you don’t have the full 20 percent saved for the suggested down payment. For many, PMI is the only way they can become homeowners. Also, in certain situations, private mortgage insurance can be tax deductible.