Private Mortgage Insurance

Private mortgage insurance (PMI) can best be described as a type of insurance policy that protects your mortgage lender should you default on your loan. Private mortgage insurance is not typically meant for every borrower, and will provide protection for a lender if you are unable to put down a large down payment or deposit. This type of insurance will usually be required if you can only afford a down payment of 0% to 5% of your overall mortgage.

It is extremely important to realise that private mortgage insurance will provide you, as a borrower, with absolutely no benefit. You are merely paying premiums to protect your lender in the event of non-payment of your mortgage. The vast majority of lenders will require private mortgage insurance due to the higher level of risk that is associated with a small deposit, and hence a larger mortgage amount.

The insurance premiums on this type of insurance policy will vary, but will generally be below 2% of the overall loan amount. The actual premium required will very much depend on how much of a down payment you can actually afford and the specifics of your loan. An example of this may be that you are able to put down a $10,000 deposit or down payment, but require a mortgage of $200,000. Your private mortgage insurance premiums will typically be approximately $1000 a year. However, you must remember that these payments will be in addition to your mortgage payment.

Private mortgage insurance is one of the very few insurance plans that is underwritten based on the amount of your mortgage, and the amount of money you are able to put down. It has absolutely nothing to do with your own individual default risk. In other words if two completely separate individuals wanted the same sized mortgage, and had the exact same amount of down payment, the premiums on their private mortgage insurance would be exactly the same. This is irrespective of their individual credit rating or background.

You should never confuse private mortgage insurance with mortgage protection insurance. They may appear to be fairly similar, but are in fact two completely different times of insurance. Mortgage protection insurance is intended to protect you, the borrower, in the event you are unable to pay your mortgage. As you are now aware, private mortgage insurance will simply protect your lender, although it will allow you to finance your home with a far smaller down payment.

Private mortgage insurance will typically be charged when you are unable to provide a minimum 20% down payment. However, there are numerous ways in which you can eventually eliminate this type of mortgage insurance. Possibly the most obvious way is when the equity in your home finally becomes greater than 20% of the value of your property. Once you have achieved this level of equity you will no longer require private mortgage insurance. Another option that many people choose to take is by making certain home improvements, which will eventually increase the market value of your home, and thus increase your equity. You may even consider making small additional payments to your mortgage each month, which over time may once again bring your equity up to the required level.

Some people have even considered taking out a “piggyback loan” in order to completely avoid paying private mortgage insurance. This will generally mean taking out a second mortgage on your home which will then ensure that your first mortgage will have an 80% loan to value or lower. However, you need to be extremely careful if this is the option you wish to take. You will generally find that a second mortgage will only be issued at a much higher interest rate than a first mortgage, which in turn is likely make any savings on private mortgage insurance negligible.

We will often do all we can to avoid paying any type of insurance if it is not specifically required. However, private mortgage insurance has, without doubt, proved extremely valuable to many people who would generally struggle to provide a substantial down payment towards a mortgage loan. The real estate market is considered to be fairly inflated, and the cost of housing yourself and your family can often seem near on impossible. If there is simply no way that you can afford a 20% down payment, then private mortgage insurance will definitely help you achieve your dream of owning a home.

It is vitally important, however, that you are always aware of how much equity you have in your home. There is really no need to pay private mortgage insurance any longer than is specifically necessary. Simply by knowing when you should cancel your private mortgage insurance may end up saving you thousands of dollars in the long run. Therefore, it is highly recommended that you fully utilise any resources available to you and cancel your PMI policy as soon as you have achieved an appropriate equity level. You should also be aware that recent financial legislation has now made private mortgage insurance tax deductible.

Comments are closed.