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UNDERSTANDING PMI - PRIVATE MORTGAGE INSURANCE
If you take out a
mortgage loan that is more than 80% of the appraised value or
sale price of your home, you must purchase PMI, commonly known as
private mortgage insurance. This type of insurance is much different
than standard
homeowner's insurance. PMI allows you to buy more house without
having to leave more down payment by protecting your mortgage lender
in case you default on your loan.
Many first time home buyers will need PMI because of the high cost of
homes. Suppose you are looking to buy a home for $150,000. In order
to avoid having to pay PMI, you would have to leave a down payment of
$30,000. That is a lot of money!
How much does PMI cost?
The cost of private mortgage insurance is going to depend on how
much down payment you utilize as well as the amount of the loan.
However, the common amount is about 1/2 of 1% of your loan.
For example, suppose you put 15% down on a $200,000 house. The lender
will multiply your 85% loan (which equals $170,000) by .005. The end
result is you having to pay $850/year for PMI. You can have your PMI
split up into monthly payments, which would equal $70.83.
Do I have to pay PMI for the entire life of my loan?
NO! You will need to follow your mortgage payments and the
principal of your loan. You will eventually reach a point where the
loan-to-value ration is 80%. When this occurs, you will need to
contact your mortgage lender and have them make sure that your PMI
coverage is discontinued. There is also a law (Homeowners Protection
Act of 1998) that not only requires that lenders inform buyers how
long it will take in years and months for them to reach the 80%
point, they must cancel the PMI once it hits this point. As
mentioned, it is always a good idea to keep track yourself so that
you are 100% certain that you do not pay more than you have to.
Be aware that the Homeowners Protection Act of 1998 does allow
lenders to charge PMI to people of high-risk, all the way down to 50%
equity. This will also occur for individuals that apply for loans
without providing proof of income during their loan approval process.
Is their any way to avoid paying PMI?
There are ways to avoid paying PMI. You can choose to pay more
interest over the life of your loan. Typical interest increase will
be anywhere from .5% to 1%. The advantage of paying more interest is
that mortgage interest is tax deductible, while PMI is not.
You can also avoid paying PMI by utilizing an "80-10-10" loan,
other wise known as a
dual mortgage. This
means you put 10% down. Your loan will be split amongst two separate
loans, one loan for 80% and another for 10%. The second mortgage is
usually in the form of an
equity loan. The 10% loan will
typically have a higher interest rate than the 80% loan, but will
still equal less than having to pay PMI. Again, the mortgage interest
for both loans will be
tax deductible, while the PMI is not. Please
note that the interest rates associated with second mortgages are
usually
adjustable.
Non-conforming loans do not need PMI.
Depending on how much money you are short of 80%, you may want to
consider
applying for an unsecured loan to makeup the difference. Star
Loan Services offers affordable good and
bad credit personal loan options that will help accomplish these
goals.
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