Private Mortgage Insurance Information for Home Buyers

What Home Buyers Need to Know about PMIUntil they buy a home, many people have never heard of private mortgage insurance. Also known as PMI, private mortgage insurance is a common type of insurance required of many people who take out a mortgage. People who are new to the home buying scene may find it helpful to know what private mortgage insurance is, who needs it, how it's obtained and other important details.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

About Private Mortgage Insurance

PMI is a type of insurance that protects mortgage lenders from the possibility of a borrower defaulting on the loan. If the borrower does default, private mortgage insurance pays the lender the unpaid portion of the loan. PMI is not always required of home buyers; it is usually only required for borrowers who are statistically more likely to default on their mortgage payment (high risk borrowers) and for borrowers who take out a certain type of loan. Private mortgage insurance does nothing to protect the home buyer; it is only designed to protect the lender.

Who Must Pay For Private Mortgage Insurance

Usually the people who are required to pay for private mortgage insurance include people who try to purchase a home with a smaller than 20% down payment, people who try to refinance with less than 20% equity in the home and people who take out an FHA loan. The lender will tell the borrower when private mortgage insurance is required.

In some cases, borrowers who would normally be required to pay PMI can be exempted from payment by paying a higher interest rate on the loan. For many home buyers, it's difficult to tell whether or not this is a good deal. When trying to decide, factors to consider include the length of the loan, the amount of the PMI, and the amount of the loan. The best way to calculate the total costs of either paying PMI or paying a higher interest rate can be done by talking to a knowledgeable lender.

Acquiring PMI, Payment for PMI and Discontinuing PMI

Unlike homeowners insurance, the home buyer does not have to shop around for a PMI policy. The policy is selected by the lender. Additionally, the borrower does not have to pay for the entire policy up front. Instead, the borrower must make monthly payments for the policy. These payments are usually wrapped up in the standard mortgage payment. In fact, some homeowners become so used to seeing PMI on their bill that they forget it's there.

Most of the time, a lender will allow a borrower to stop paying PMI after there is 20% equity in the home. Borrowers must maintain good communication with their lender to find out when they can drop private mortgage insurance.

PMI Costs

The annual cost of private mortgage insurance can be as much as 1% of the entire loan. If the loan is $100,000, the annual cost of PMI will be $1,000. In this case, the monthly payment for the PMI will be a little over $80 each month.

Contact Your Real Estate Agent

For more information about private mortgage insurance and other important home-buying topics, talk to a professional Spicewood real estate agent. A reputable real estate professional can answer your questions and make the home buying process clearer overall.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

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