Private Mortgage Insurance

Traditionally, mortgage lenders required individuals who wanted to purchase a property to have access to a 20 percent down payment of the total cost of the property. There are many people who are unable to put down 20%, but are able to qualify for mortgages and pay what is called PMI (private mortgage insurance). When you pay PMI, you are able to pay less than the 20% down payment. Many first time home buyers, and young home buyers elect to pay PMI on their mortgages since they have not had very long to save their money to come up with the 20% down payment. Private mortgage insurance, while it increases the amount of money you are paying towards your loan, is a wonderful option as it allows people to purchase a home that they otherwise would not be able to. As property prices increase, it becomes more and more difficult for the average family to have 20 percent of the total loan amount to put down, and PMI solves the problem.

What is PMI Exactly?

Private mortgage insurance will pay the mortgage to the lender if the borrower is unable to and defaults on the mortgage payments. It is insurance that helps mortgage lenders reduce the risk in buyers who do not have 20% of the total home value to put down when buying a property.

How PMI Costs are Determined

If you do not have enough money saved to put 20% down on the property you want to buy, the amount of PMI that you have to pay is based on the total loan amount, as well as the amount of money you actually are able to put down towards the purchase of the home. An average cost of PMI on a $100,000 mortgage with a 10% down payment would be around $40.00 per month.

Stop Paying PMI

If you purchase a home with no down payment, or a low down payment, and you are paying PMI- you can stop paying PMI after you’ve established 22% equity in the property. In fact, all mortgages signed after July 29, 1999 are required to automatically terminate PMI once 22% equity has been reached, as established by the Homeowners Protection Act. As with any law, however, there are exceptions to the Homeowners Protection Act. If you are a high-risk loan, have additional liens on the property or you are not keeping up with your payments, lenders may be able to maintain the PMI on your loan.

Alternatives to PMI

With a little research and effort, you may be able to avoid paying PMI even when you do not have a 20% down payment available. Some lenders allow you to combine two mortgages together. For example, you can combine your first mortgage with a “piggyback” second mortgage, or with a home equity line or home equity loan. The two payments for your mortgages are often less than a single mortgage with private mortgage insurance. Using two mortgages can typically be done with a down payment of just 5%. Another option is to request a higher interest rate as opposed to paying PMI. The advantage to doing this is interest is tax deductible, and private mortgage insurance is not.