Home Matters: Private Mortgage Insurance

By | December 20, 2013

Personal Home & Auto InsurancePurchasing a home is a dream for most. For those who cannot afford the 20 percent down payment, private mortgage insurance (PMI) can make that dream a reality. Here’s how:

 

What is PMI?

If you default on your mortgage, PMI protects your financial institution from losing money. In general, PMI is not required when a borrower makes a down payment of 20 percent or more. When required, PMI payments vary, but they are usually one-half of one percent of the loan and are not tax-deductible.

Here’s the breakdown: if you purchased a $100,000 home and put $10,000 down (10 percent), then the lender is responsible for 90 percent ($90,000). So, $90,000 is multiplied by .005 percent for an annual PMI of $450 or $37.50 per month.

PMI payments are required until a homebuyer pays one-fifth of the principle of the loan.

 

Avoiding PMI Payments

In this tight market, avoiding PMI is very difficult. Yet, even if you cannot afford to put 20 percent down when purchasing a home, there are things you can do to try an avoid PMI:

  • Talk with your lender. If you have a good credit score and financial history, the lender may have a less than 20 percent rule in place.
  • Some lenders will waive PMI if you accept a higher interest rate of .75 to one percent more. Mortgage interest is also tax deductible.
  • Obtain an 80-10-10 loan. On this plan, 90 percent of the loan is financed with a first mortgage equal to 80 percent of the sale price. Then, a second mortgage is applied for the remaining 10 percent of the sale price with a higher interest rate. The monthly payments of the two mortgages are typically lower than paying one mortgage with PMI.
  • Tell your lender that paying PMI is a deal-breaker for you and that you will take your loan elsewhere if it is not waived. This may give you some bargaining power when negotiating your loan.

 

Terminating PMI Payments:

  • Keep track of your payments on the principle of your mortgage so you know when you’ve paid 20 percent. According to the Homeowners Protection Act of 1998, lenders must tell buyers at closing how long they should have to pay PMI. However, you should keep track of this information too!

 

When conducting a home search, only look at properties that you can afford without putting yourself in a financial crunch. Remember… you will still need money to decorate and furnish your home, pay for an inspection, pay for utility costs, etc. All of these expenses can add up quickly so it’s best not to stretch yourself too thin.

Home Matters – Private Mortgage Insurance


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