- Private mortgage insurance is not for everyone. Most people who are familiar with the term are first-time homebuyers who do not have the funds required to make the standard 20 percent down payment. That's where private mortgage insurance comes into play.
- If a prospective homebuyer is unable to put at least 20 percent down, the lender requires private mortgage insurance. By ensuring that your home's balance will be paid, this policy protects the lender's money in the event that you default. Although the price of private mortgage insurance varies based on your lender, it typically costs about 1 percent of the mortgage amount per year. That's about $1,000 a year for every $100,000. So, for a $250,000 loan, you can expect to pay around $2,500 per year in private mortgage insurance.
- Although the cost may seem substantial, private insurance does have its benefits. First, it offers more buyers access to home ownership. In addition, it also saves potential homebuyers a good amount of time since they do not have to accumulate a large down payment. This gives low-income families and younger buyers the opportunity to purchase housing that they otherwise could not afford.
- After you have paid your balance to 78 percent of the home's value, mortgage lenders are required to automatically cancel PMI. Be warned, however, that lenders will review your payment history and home value before terminating coverage. If you are deemed a high-risk borrower, the lender can legally require you to pay 77 percent of your home's value before canceling your policy, and you must still be current on the loan, with no payments 30 or more days late. For the average homeowner, it will take 10 to 15 years to pay 20 percent of the home's value. However, if you live in an area where home prices are drastically increasing, you may be able to pay down the balance faster.
- While PMI is beneficial for many homeowners, it can be quite costly. A piggyback loan--or 80/20 loan--is one alternative to avoid the cost of private mortgage insurance. Regardless of which loan you are considering, consult with several lenders to determine what's best.
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lightray15 said
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