Do You Know What Private Mortgage Insurance Is?
December 11, 2011 in Home Buying Process
Private Mortgage Insurance (PMI) is insurance that protects the Lender in case a Home Buyer defaults on a loan? Most Lenders require PMI whenever a Home Buyer is putting down less than 20% of the purchase price of a home and then pass the cost on to the borrower.
PMI does not, as some people believe, provide protection for a Home Buyer, such as paying off the mortgage balance in case of death, disability or unemployment. PMI is required by Lenders in most cases where the Buyer’s equity position is less than of the home’s value, because the less equity a buyer has in a home the more risk there is that he or she may default on the mortgage.
If PMI protects only the lender, how does it benefit the buyer? The most important benefit of PMI is that it opens the door to homeownership for many buyers, not only in Elkhart County, Indiana but all across these great United States of America and is enabling them to buy homes sooner (often by several years) than they otherwise could, because they don’t have to wait until they save a 20% down payment. Even buyers who can afford a 20% down payment may opt to put a smaller amount down, for tax or investment reasons.
In the past, PMI premiums were fairly consistent, ranging from .005% to .0025% of the loan amount per month, depending on the level of equity the borrower had in the home. Recently, PMI insurers made a beneficial change providing an alternative to the large up-front premium that borrowers traditionally paid when the loan closed. Now borrowers have the option of playing an up-front fee or paying a slightly higher monthly premium.
A few lenders offer buyers an alternative to PMI. Basically, the lender self-insures, offering a loan to the buyer at a slightly higher rate, which compensates the lender for the added risk of a low down payment loan. Going with a lender who self-insures has two advantages: First, PMI companies sometimes turn down borrowers whom lenders have already approved. With a self-insuring lender, this risk is eliminated. Also, the extra interest paid may be tax deductible, unlike PMI payments, which are not.