Private Mortgage Insurance (PMI)
PMI or private mortgage insurance is insurance that you must purchase if you do not have a twenty percent down payment. The insurance is to protect the bank if you were to default on the loan. It is not insurance to protect you. PMI is usually based on a percentage of your mortgage that you must pay every month. It will vary according to the amount of your loan and your credit risk. Since the housing crisis many banks are more reluctant to lend to owners who may be at risk of default, but if you fit into this category, you will be required to have PMI.
What Does PMI Do?
PMI was put into place to protect the banks that are lending money to you. It will help the bank recover if you were to default on your loan and go into foreclosure. It does not protect you, the borrower, in anyway. If you stop making payments, you will still lose your home. It is not homeowners insurance and it will not protect your belongings or your property if your home is destroyed. it is there to help the bank recover if you were to default on your loan.
Can I Avoid PMI?
You may be able to avoid PMI insurance by taking out a second loan for the additional amount you need to borrow. This is a form of creative financing. Your loan amounts will be 80/20 or 80/15/5, with the five being a down payment that you saved up yourself. If you decide to do this, it is important to realize that you need to add the costs of both loans together when you are considering how much you can borrow. You may be better off saving a down payment for your home.
Additionally, if you are a credit risk, you may still be paying for your risk with higher interest rates. PMI may be looked at as a negative thing, but it depends on the loans you are looking at. If you have PMI on a lower interest loan, you may end up saving money in the long run, rather than paying a higher interest rate the entire life of the loan. It is important to look at the entire picture when choosing your loan.
The best way to avoid PMI is to save up money for a down payment before you buy a home. This can take time and it may be frustrating if you feel pressured to buy a home right now. However, the added equity in your home can make it easier for you to purchase a nicer home and it will take the pressure off if you need to sell your home in the future because of a move. It can help you avoid becoming upside down on your mortgage. In general, it makes the entire process of owning a home much easier.
Does PMI Protect Me If I Can't Make My Payments?
Some homeowners mistakenly think that PMI will protect them if they can no longer make payments or may think that they have with PMI. This is not the case. It is an insurance policy for the bank that you are required to pay for. If you stop making payments, you can lose your home, and it is important to make sure that you understand this. As long as you have a mortgage on your home, you should also have home owner's insurance. It is required by the bank, but you should have it even after you have paid off your home.
Can I Cancel PMI?
It is important to realize that you can cancel PMI once you have paid your loan down so that you only owe eighty percent on your home. However, this may take longer than you realize, because a large percentage of your beginning payments goes to the interest, and very little actually goes to your principle. Some lenders will allow you to cancel PMI after two years of on time payments.
Banks will not automatically cancel PMI for you when you reach the point that you no longer need it. If you know you have build enough equity into your home, you can call your bank and have them review your loan to have the PMI requirement dropped. This will make your house payment more affordable in the future. If you are purchasing a home without a down payment through a program like an FHA loan, you should be take PMI into account when planning out your new budget. This will keep you from purchasing more home than you can afford.