Private Mortgage Insurance is an important facet of mortgage acceptance. Many home buyers, especially first time buyers, find it difficult to save up the large down payment required to purchase a home. This leaves them with the choice of securing a sub prime loan or utilizing mortgage insurance to gain a new home. With future changes coming to the structure of many loans, specifically the standard 30 year mortgage, private mortgage insurance will play a larger role in creating opportunities for home ownership.
Understanding Mortgage Insurance
Understanding Mortgage Insurance: Known as PMI, private mortgage insurance is simply insurance purchased by the lender and paid for by the home buyer. This insurance protects the lender in the event of a default. By reducing risk to the lender, this decreases a barrier to providing funds to home buyers, who have less than the percentage down payment.
Calculating the Cost of PMI
Calculating the cost of PMI: Private Mortgage Insurers typically charge a annual premium. This premium is based on many factors, and can be small but substantial in the case of certain high risk borrowers. As an example; A home purchaser has a down payment of 10 percent for a 100,000 dollar home. Lets say the Insurer charges an annual premium of .050 percent. The loan amount is 90,000 which is then multiplied by the rate of .050 percent. This makes the annual premium 450 dollars or $37.50 per month. This amount is then added to the monthly payment of the loan. This is just an example as Private Mortgage Lenders determine their own annual premium.
PMI Early Termination
PMI can end before the life of the loan: Many times, the private mortgage insurance is no longer required after a set time. This time is referred to as point in which the Loan to Value Ratio reaches 80 percent of the original loan amount. To put it simply, when the loan reaches 80 percent of the value of the home then the homeowner can request that PMI be discontinued. Of course the longer the loan is paid down the lower the LTV will be. Some loans and some lenders require that PMI cover the life of the loan regardless of the LTV.
PMI Helps with Credit
Since the 2008 Great Recession and the subsequent foreclosure crisis, lenders and mortgage holders have been concerned about default rates. The full fallout from the recession and crisis is still being felt by many. PMI helps persuade the lenders to provide credit to home buyers who may not have the full down payment amount. Potentially as changes in lending practices and laws occur, PMI will become even more important in securing loans for medium to high risk home buyers.
PMI is an excellent way for a borrower to get a chance at that new home. The impact to the home buyer is minimal in monthly and annual costs while reassuring the lenders and mortgage holders. Private Mortgage Insurance helps keep loans costs within reach of consumers.