1. What Is Private Mortgage Insurance
It is a type of insurance policy that’s meant to protect the financial institution that has given you the loan, in the event you fall behind in your mortgage or if your home ends up in foreclosure. Private mortgage insurance, also called PMI for short, is a separate fee that is paid in addition to your regular mortgage payment.This means you’d pay your regular mortgage payment every single month, as well as your monthly PMI fee.
If you buy a home and you don’t have at least 20% of the asking price to put down as a down payment, then you will need PMI. The only real way to avoid needing the insurance is to put down at least the 20% or more. In short, the more money you have to put down, the better.
The bottom line is PMI is assurance for the lender. It is a way for them to know they will not lose all of their money in the event you default on mortgage payments. It is basically an insurance policy for your mortgage.
2. The Benefits
First pro is that you can take advantage of home values as they rise. For example, if you only have about 10-15 percent to put down as a down payment, then you can get PMI and buy the home. This eliminates the need of having to wait many more months to get the full 20% of the asking price, and at that time the prices of the homes you’re looking at may go way up. PMI allows many prospective homeowners the chances to own a home without the need of having a larger down payment.
Second benefit is you can lock in low-interest rates. It doesn’t matter how little you have to put as a down payment, if the mortgage rate is low, then you can lock in that rate. If you were to wait for months to save up the rest of the 20%, then you might not get the same rate, even if you have more money to put down. If you can secure a great interest rate right now on a mortgage, but you don’t have 20% of the asking price for the home you want to buy, then PMI can be a real lifesaver.
Another benefit is that lenders will receive peace of mind because they know if you default on your mortgage payment, then they’ll still receive their payments. In turn, they may be more lenient when you apply for a mortgage. If there are small flaws in your application for a mortgage, then the lender may overlook it because they know you will need to get PMI.
Without a doubt, the best thing about PMI is being able to get the home you want, even if you don’t have 20% of its asking price. A lot of people aren’t even aware that private mortgage insurance allows them to do this. Sure, this means higher mortgage payments, but to many people this isn’t an issue.
To sum up the above, the pros of PMI are:
. Take advantage of rising home values
. Lock in low-interest rate on a mortgage
. Mortgage lenders may be more lenient
. Get the home you want
3. The Cons
First con is the price, as it can be very expensive to get private mortgage insurance. Different lenders have different rates, but you can expect to make a large additional payment. Remember, you have to pay your regular mortgage payment every single month and at the same time you have to pay the PMI fee every single month. At first this may work out, but you may find yourself struggling to make your mortgage and PMI payments further down the road.
Second con is removing it completely can be extremely difficult, even if lenders have no problems adding it to your mortgage. It doesn’t matter what lender you go through, the chances are you may struggle to get rid of the insurance. When your loan amount drops to a certain loan-value ratio, then the lender will not automatically remove it. What you have to do is submit a request to the lender and you do this via a letter and then the lender will give you a response, which can take a longtime to receive.
Third con is there may be a non-cancellation clause in place, which means you’ll be required to continue paying for PMI for a certain number of years. It doesn’t matter how much of your loan you pay off, if there is a clause in place, then you’ll still be on the hook for PMI. When you sign for the mortgage and PMI, make sure you read the fine-print carefully.
To sum up the above, the cons are:
. Higher mortgage payments
. Getting rid of PMI can be difficult
. Non-cancellation clauses might be in place
4. How Much Does It Cost
Generally speaking, you can expect to pay around one-percent of your loan amount. For example, if your loan is for $100,000, then you could pay around $1,000 per year. That is if the PMI fee is one-percent, so it could be a bit more than that or a little less than that.
Bear in that there are many factors that play a role in how much you’ll pay for PMI. Your lender will let you know beforehand, but make sure you only accept the mortgage and the PMI if you are 100% certain you can pay both and still have money leftover for your living expenses. As previously mentioned, it’s best if you can put down at least 20% of the home’s asking price, that way you can avoid being required to buy PMI.