8 - 2012

Why You Need Private Mortgage Insurance

Most people have heard of PMI, but they really don’t understand what it is and what the term means. PMI is private mortgage insurance. Lenders will require a buyer to have PMI when they have less than the standard 20 percent to put down on their home. This extra policy is a little more assurance for the bank that the loan will be repaid. It puts the lenders in a safer position and they are more likely to lend to someone who adds PMI.

Commonly, the greater the mortgage amount, the more risk is involved from a lender’s viewpoint. Private mortgage insurance is a safeguard if the buyer defaults on the home. Generally, it is a way for the lender to get their money back should a default occur. The down payment is nothing more than good faith money to back the loan. The more money a buyer comes to the table with, the more apt they are to not want to default, or this is the general consensus from lenders. That is why most mortgage companies want 20 percent down. They feel that they are getting a big chunk of the mortgage up front means they are less likely to be dealing with a foreclosure down the road. When people invest that much money into a home, it is a little harder to walk away.

PMI is billed into the monthly mortgage payment monthly. It can be as little as $60 or as much as a few hundred. Again, this will all be determined by the price of the home and how much money is put down. Many people, especially in today’s society, do not have 20 percent to put down on their home. Rather than waiting until the down payment is reaches, they will simply purchase PMI. The borrower can own and live in the home and continue to build equity. They can also take advantage of the deductions they pay on things such as taxes. It allows a family to buy their dream home and also be saving for the down payment in small monthly increments.

Basically, the PMI is an investment account that goes toward the down payment. When the buyer reaches the 20 percent, they can ask for the PMI payment to be stopped. The law required that the PMI payments be automatically stopped when a mortgage down payment reaches 22 percent.

Private Mortgage Insurance has its downsides, but it allows a person to get in their home quickly. They person will also continue to build equity in the home and they will still reap the benefits of home ownership. With the housing market being in dire straits, lenders have become more picky with whom they will grant a mortgage to. If there is no way to come up with 20 percent, there is still hope at owning a home. Rather than doing some 80/20 split and having two mortgages, just simply add PMI to the loan. Forget about scrimping and saving for that dream home, just purchase PMI and still get the perfect home.

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