Explaining private mortgage insurance (PMI) in under 5 minutes
Definition and example of private mortgage insurance
Private mortgage insurance is a policy that protects your lender in case you default on the loan. It covers part or all of the remaining mortgage balance and is often required. The bank determines your private mortgage insurance premiums in the initial loan estimate and the final closing disclosure.
How private mortgage insurance works
Like any other type of insurance policy, you pay premiums to cover damages if a bad event occurs. The insurance company is responsible for paying off your loan if there are reasons that make you unable to do so. Banks consider this more likely to happen if you have a lower equity stake in the property. This would happen if your equity stake is less than 20% initially because you did not put down a large amount.
PMI vs. mortgage payment insurance
PMI is different from mortgage payment insurance (MPI). Mortgage payment insurance will not pay the total remaining amount on your loan if you default, but it will pay you some payments for a certain period if you encounter covered issues, such as job loss, disability, or severe illness.
Advantages and disadvantages of private mortgage insurance
There are advantages and disadvantages to private mortgage insurance. On the positive side, it can make it easier to obtain a loan because it reduces the risk you present to the lender. They may be more willing to overlook a low credit score or a small down payment. Additionally, the premiums have enjoyed tax deductions, at least until 2021. I believe tax law has shifted this area with changes in tax laws annually.
Importantly, private mortgage insurance gives you greater purchasing power. It reduces the down payment you need to complete the purchase transaction, which is very helpful if you’re struggling to secure funds or if you want to invest less upfront.
The main drawback of private mortgage insurance is that it increases your monthly mortgage payment. It can sometimes also raise your closing costs. Another downside is that mortgage insurance exists solely to protect the lender in case of default. It does not provide you with any protection if you default.
Should I pay for private mortgage insurance?
Avoiding PMI generally requires you to pay 20% down or more. This isn’t true for all lenders, but it’s a good rule of thumb. The cost of this type of insurance generally ranges from 0.5% to 1% of the loan value annually, but PMI costs can vary. The lender will determine your insurance premiums in the initial loan estimate, as well as in your final closing disclosure. You should expect to pay the premiums either upfront at closing, monthly as part of your mortgage payments, or both.
The good thing about PMI is that it is not permanent. You can request to cancel PMI and remove it from your mortgage payments when you build 20% equity in your home. The process for this varies from lender to lender, but it’s essential to submit the request in writing. Often, a new appraisal of your home is required.
Contact your lender when you approach the 20% mark for full details on how to cancel PMI. The lender is required to terminate PMI on your behalf once your balance drops to 78% of the home’s value, but you must be current on your payments before they can cancel your insurance policy.
Source:
https://www.thebalancemoney.com/private-mortgage-insurance-pmi-2386166
اترك تعليقاً