Benefits of Private Mortgage Insurance (PMI)
You don’t want to part with your hard earned money, so you need to know the benefits of taking out private mortgage insurance when you get a mortgage for a new home. Generally, the purchase of a new home means that you have to save up money for several years to have enough for the required down payment, that is usually 15% or 20% of the purchase price of the home. A typical single family dwelling now sells for at least $200,000, so that means you would have to have $40,000 saved up. With private mortgage insurance, you don’t have to wait until you have all that money saved because one of the main benefits of having such an insurance policy is to lower the amount of your down payment.
Private mortgage insurance is an insurance policy that you take out to assure the lender that he/she will receive the money back if you should default on the loan. This is not the same as having life insurance on the mortgage and you will not receive any financial gain from the insurance if you are disabled or if you die. The insurance will not pay off the loan for you in either of those cases. It is simply for the protection of the lender.
However, there are advantages to having private mortgage insurance for the borrower. When you take out a policy to protect the lender, the bank or financial institution that you deal with will allow you to pay a lesser amount as a down payment. This insurance is required if you borrow more than 80% of the total purchase price of a home. You could get away with having to pay only about 5% of the total. On a home that costs $200,000, you would only have to come up with $10,000. This is a difference of $30,000 under regular circumstances.
You can choose to have the cost of the insurance included with the mortgage loan, so that you do not have additional closing costs. Usually the first year’s payments for the premium are included in the closing costs that you have to pay separately from the mortgage. After that the amount of the premium is included with your monthly mortgage payment to pay the policy for the following year. You can also choose to make the payments yourself on a monthly basis and only pay the first month’s premium in the closing costs.
Another benefit of having private mortgage insurance is that once your unpaid balance goes below the 80% of the total purchase price, you can cancel the insurance and you don’t have to pay any more premiums. Some insurance companies do this automatically, but you have to watch out for it as well. It is possible for the lender to pay the premiums on the policy, but in order to have this arrangement, you will have to pay a higher rate of interest on the loan. Once again, you can request that the lender cancel the policy when you have repaid 20% of the mortgage amount and request a lower interest rate. If the lender is paying the premium, you cannot cancel the policy on your own.
When determining whether or not it is time to cancel the policy depends solely on the unpaid balance of your loan. If you have made improvements to your home and the value has increased, this has nothing to do with cancelling the policy. No appraiser will come to inspect your home. Just keep in mind that the decrease will not happen over night. With the interest charges on the mortgage, it could take 10 or 15 years before you have 20% of the mortgage repaid.
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