News Understanding Private Mortgage Insurance

Understanding Private Mortgage Insurance

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When you go to buy a house, you have a lot of different options as far as financing goes. Most people will end up taking out a mortgage, and the size of that mortgage greatly depends on how much money you have saved up before hand. One of the biggest things that most people don’t understand is that Private Mortgage Insurance, or PMI, will severely eat into their savings. Read on for more details.

The 20/80 Dilemma

When it comes time to buy a house most people will have something to put for a down payment. While in the past the rule was that you needed 20% down, and then you could get a mortgage. Well, that’s not entirely true anymore. In fact, you can get a house now with absolutely nothing down; provided your credit is good enough. The tradeoff is that you will have to put up with PMI premiums.

What is Private Mortgage Insurance?

PMI is a tool utilized by mortgage companies to protect themselves. They buy an insurance policy that says if you default on your loan, they will be able to get their money back regardless of what the house sells for during foreclosure.

Of course mortgage companies aren’t in the business of paying for insurances. So instead of just eating this cost of business, they pass the fee along to you. You get to pay the premiums on an insurance policy that will never benefit you. Low and dirty? Yes, but it is perfectly legal.

How to Avoid PMI on Your Loan

There are ways to get around paying these premiums though. Some are better options than others.

Put 20% down – If you can gather up 20% to put down, then that is the best way. Never worry about the PMI from the start. Of course if this means cashing in your retirement, that’s a pretty poor choice.

Take a second loan – Many people take out 2 loans when they buy a house. One is for 80% of the house value, and the other is for 20%. They avoid paying PMI, but the loan covering 20% is often at a higher interest rate and the savings are a wash.

Pay it down – You can take out a home mortgage and pay the PMI for the first couple of years. By aggressively paying down your house, you will be able to get rid of that PMI payment quickly. Now keep in mind that you will have to ASK the mortgage company to remove the premium when you own more than 20% of your home. They will likely require you to pay for an appraisal (about $500).

Taking PMI into Account

When you are shopping for a house, keep in mind that PMI is a very real part of the cost of getting a mortgage. It isn’t terribly expensive, it will run you about .5% of the value of the house every year (meaning if it’s a $200,000 house your premiums will be $1,000 each year), but it is incredibly annoying and a setback to meeting your financial goals. So if you are searching for a home with a real estate agent, you need to remember that your monthly bill may be a little more than you expect.

Understanding Private Mortgage Insurance
General Contributor
Janice is a writer from Chicago, IL. She created the "simple living as told by me" newsletter with more than 12,000 subscribers about Living Better and is a founder of Seekyt.

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