What Every Mortgage Holder Should Know About
PMI
Insurance - we need it for our life, our car, our house,
our health and yes, in some cases, even for our
mortgage. Private Mortgage Insurance (PMI) is the
mortgage industry term used to describe insurance that
protects the lender of your mortgage against any type of
default. It's primarily used when you put down less than
20% of the purchase price of your home.
Each month you will be required to submit a premium payment
that is calculated based on how much your down payment is and
the total size of your loan. Typically the payment
amounts to around one-half of one percent of the total loan
value. These payments are usually added to your mortgage
payment to make it easier to keep track of and keep paid.
The good news about PMI is that for those who are required
to obtain it, they won't need to keep it through the life of
the loan. Typically when you reach the point where you
have paid down 20% of the loan amount most mortgage lenders
will automatically discontinue the PMI insurance
premiums. They are required by law to discontinue it
when you your total remaining balance on the loan reach 78% of
your original loan amount. For most homeowners, this
will amount to roughly a $37 - $50 reduction in monthly
payments.
You should be aware that if your loan is classified as a
"high risk" then by law lenders can require you to maintain
PMI insurance until you have 50% equity built up.
Typically such loans are made to those who took out loans in
which they didn't produce adequate documentation of income,
and those with spotty credit histories. It is always
best to talk directly with your mortgage provider about the
length of time you will be required to carry PMI. When
you sign the paperwork for your mortgage they should include
information about when you will no longer be required to carry
PMI.
Of course, the best financial move you can make is to not
have to pay PMI at all. Some ways to avoid having to pay
this include taking on a higher interest rate (typically from
.75 to 1 full point) or taking out two mortgages to purchase a
home, with one covering 90% of the purchase price and the
other covering 10%. Both of these options require you to
carefully go over the numbers to see if they provide financial
benefit over the life of the loan. A full percentage
point increase in interest can amount to a massive amount of
additional interest charges over the life of the loan that may
far exceed what you would pay in PMI insurance.
Of course, if you really want to come out ahead in the
whole mortgage game your best bet is to have 20% down for your
down payment and make sure your credit report is as clean as
you can get it. It takes time to achieve both of these,
but a few years of savings and working on your credit can reap
great rewards in your dream of buying a
house.
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