Private Mortgage Insurance (PMI) is generally required for borrowers who make a down payment of less than 20% of the purchase price of a home. The monthly PMI premium for a conventional loan is determined by factors such as the borrower’s credit score and down payment. PMI rules for non-typical mortgages, like Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) advances, may contrast somewhat.
The 20% Down Payment Rule
The financial institution guideline that generally requires people to make a down payment of at least 20% of a home’s value to avoid paying PMI stemmed from the idea that many lenders believe that, in most cases, they can get 80% of a home’s value at a foreclosure auction. Borrowers can request to have their monthly mortgage insurance payments waived once the loan-to-value ratio falls below 80%. When this ratio drops below 78%, mortgage lenders are required to drop PMI premiums.
Mortgage insurance protects the lender
Mortgage insurance is not designed to protect the borrower in any way. It protects the lender from incurring losses in the event of a mortgage default.
For example, if a borrower made a 5% down payment, the lender would work with a mortgage insurance provider to provide coverage for the remaining 15%. In theory, if a borrower were to default, the bank could recover approximately 80% of the value of the home at auction, 15% of the value of the mortgage insurance, and a 5% down payment. While PMI cannot guarantee total loss protection for the lender, it is design to help lenders recover the majority of their invest principal in the event of a default.
Home purchase: You do not have to pay private mortgage insurance or PMI
Private mortgage insurance, or PMI, is a type of insurance that insures the lender in case the buyer defaults on the loan. The lender, or bank, requires PMI when the buyer has a down payment less than 20% of the asking price of the home. Private mortgage insurance has good and bad points, and there are ways to avoid paying for it without putting up the required 20%. The good point about PMI is that it allows you to buy more than one house without having to save up to the required 20%.
Private mortgage insurance has its good points. Many Americans can now achieve the American dream with popular 3-5% down programs. These programs are possible due to private mortgage insurance. When you buy a home you are require to purchase traditional homeowners insurance. On top of that, you’re obligate to pay PMI premiums, usually into your escrow account, if you don’t put up at least a 20% discount. Private mortgage insurance does not give you additional homeowners insurance coverage, but it gives you bank insurance only if you default on your mortgage payments.
The use of PMI has been a great tool to get more Americans into households, but there are some downfalls. PMI falls The problem with private mortgage insurance is that it raises Your monthly payment and, unlike the interest on a traditional mortgage, PMI is not tax deductible. You can cancel private mortgage insurance if you can show that you owe 80% or less of the value of your home. Getting your mortgage balance up to 80% of the value of homes can take many years. The good news is that you can have all three: A low payment, a low monthly payment, and NO PMI!