17 Jul
Private Mortgage Insurances are mortgage insurances from private insurance companies that borrowers need to pay to their mortgage lenders if they’re paying less than 20 percent of the amount needed for buying a house as down payment. Similar to other mortgage insurances, PMI insures the lender against losses if a borrower fails to pay off his home loan. Hence, PMIs qualify borrowers for loans that they were not eligible to get while reducing the risk of money lenders lending money to their borrowers.
This, however, increases the overall loan amount as the borrower ends up paying monthly mortgage insurance, which eventually gets added to total monthly payments they make to the money lender.
Private mortgage loans can come as an absolute savior to anyone who needs to bridge the gap between the granted loan amount and the 20% down payment that is needed to purchase a house. That said, one needs to know more than just the basic definition in order to go ahead with a PMI.
These are the things you need to know to help get you started:
1. When Is PMI Required?
As far as a conventional loan is concerned, if the down payment of the house you’re buying is less than 20% of its value/price, your lenders will require you to have a PMI. These mortgage insurance premiums will have to be paid until one has enough equity in the property to have a loan-to-value ratio or what is also known as LTV. LTV is the amount borrowed divided by the value of the property, which is 80 percent.
2. What Are The Different Kinds of PMI?
There are many different kinds of PMI. The type of mortgage insurance required relies on what kind of private mortgage you get.
There are essentially two kinds of PMIs available:
- Private Mortgage Insurance
These are for conventional loans that are purchased from the private sector - Government Mortgage Insurance
This is the mortgage insurance bought from the government and is made for those with Federal Housing Administration (FHA) loans. In this case, the premiums remain the same for all borrowers regardless of their credit score. An FHA Mortgage insurance has an upfront cost as well as a monthly cost.
3. How Do You Pay Your PMI?
PMI cost is deducted on a monthly basis, much like EMIs. You can be certain that your PMI will automatically disappear after you have paid off 22% of the value of your property. However, borrowers also have the choice of opting out after 20% has been paid off. It goes without saying that since you would usually want to pay as little PMI as you possibly can, it’s crucial that you keep a check on its development.
Once you have successfully paid your mortgage down to 78% of the original amount of the property, the lender is legally bound to cancel your policy. The term of the payment of PMI premiums depends on the value of the property and, subsequently, the rate of the down payment. You can simply send just one payment to the lender on a monthly basis, which will typically also include the mortgage payment for your current loan.
4. PMI is For The Protection of Your Lender
While it’s acknowledged that PMIs help the borrower/buyer with buying a property, it’s technically more of a protection for your lender than it is for you. Let us understand this in detail.
If you have to put down 10% of the value of the property and the other 90% is a loan, a mortgage insurance will ensure that if the lender has to foreclose your mortgage in the event that you fail to pay your premiums regularly, his losses will be limited, whereas you will have lost the money of the premiums already made.
Even then, the lender’s losses are partially insured in the sense that if your loan gets foreclosed after you have paid 25%, the lender will not lose out on the remaining 75%. PMI covers the following for the lender: the other 25%, 25% of the delinquent interest, and 25% of the foreclosure costs of the lender.
5. How Can You Avoid PMI?
PMI helps you qualify for a loan that you perhaps wouldn’t have bagged. But let’s not forget that it also increases the overall value of your loan and subsequently the amount you have to pay off along with the usual mortgage cost for the house. Moreover, as already mentioned, in case you fail to pay off the loan, it only helps the lender and not you. So, you may want to avoid PMIs when possible. The easiest way to avoid PMI is to just pay the 20% for the down payment of the house you’re buying.
If not, there are still a few other options that do not require PMI.
Some lenders offer conventional loans that do not require PMI, but usually come with higher interest rates. These may or may not be more expensive than paying PMI premiums monthly. Before you decide on whether you should avoid a PMI loan, consult with your tax advisor as to how PMI premiums and higher interest rates will reflect on your taxes.
Another popular way to avoid PMI is to adopt the ‘piggybacking’ formula, which is basically applying for a smaller loan to raise the 20% for your down payment instead of paying PMI. However, before you consider that, remember that the interest rates on such loans will probably be higher than PMI premiums. To offset this, the risks are also considerably lesser as compared to opting for PMI, which is biased towards the protection of the lender instead of the borrower.
Before you go ahead with a PMI loan, weigh the options available and go ahead with the risk. However, in case you do opt for one, don’t forget to ask the lender to show you the pricing for different options in detail to enable you to make the right choice.
To learn more about mortgage options and possible rates you may incur on yours, call Mortgages, Mortgages at 866-307-0747 or contact us here.