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What is PMI Insurance?

By Marilyn Katz

Republish: EasyPublish™
Published: 02Mar2010
Word count: 531
Viewed: 248 time(s)

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Private Mortgage Insurance, usually called PMI, protects mortgage companies if borrowers default on their loan. You must understand that it does not protect the borrower who usually is the one who has to pay for it.

It will not take away that borrowers responsibility for a loan, and it will not protect credit if a loan goes into default. Mortgage companies often require the purchase of PMI if a borrower cannot put down twenty percent of the purchase price.

To be fair to loan companies, they are taking a lot more risk when they lend to people who do not have twenty percent to put down. The borrower is taking less of the risk of the home purchase, and he or she is putting more into the lap of a mortgage company.

Many factors may prevent them from getting the full purchase price of a home back if a borrower defaults.

In addition, the type of borrower who can come up with a larger down payment may have more resources. They will be less likely to default.

PMI is not always evil. Lots of people take this coverage in order to qualify for a loan.

It is not always a bad option. Sometimes it may be the only way to qualify for a mortgage on a home that makes sense to buy. For moderate income families, the premiums are also tax deductible, so the real cost is less than the price that is quoted. You need to consider these factors when you sit down and figure out if a certain loan and home purchase is the right one for you.

But there are lots of reasons to avoid private mortgage insurance if you can.

Cost is the biggest reason to look for another option. The premium could be about 1% of your loan per year. This is simple to illustrate. For every $100,000 of your loan, you can pay $1,000 a year for PMI.

Spread this out over monthly payments, which is how most of us pay for our home mortgages. This is about an extra $80 added to your home payments. For a $250,000 loan, this is about $200 a month. This is a real cost that must be added to your cost of home ownership!

Look at how much harder it will be to budget for mortgage payments if you have to pay a couple more hundred dollars a month.

And of course, these payments mean that less of your check actually goes towards building up your equity. So it can take you longer to ever get to that 20% equity point where you can cancel the PMI!

Sometimes it makes good sense to buy a home before you can put down twenty percent. But you really need to look at your own individual situation. We have certainly seen that a lot of people lost their homes because they did not understand the real costs of homeownership.

You loan payments, PMI, homeowners insurance, etc. are only the beginning. Now you will also be resposible for upkeep and repairs. And if your situation changes, you may need to sell your home quickly. This will be tougher, in many cases, if you do not have much home equity.

We can give you some ways to avoid pmi. If you are buying a home, or if you already own one, look at our homeowners insurance calculator.

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