What is Private Mortgage Insurance and Why Do I Have to Get it?
One extra cost that is often added to the mortgage payment of a new home is Private Mortgage Insurance (PMI). This insurance is required for homebuyers who don't put a full 20 percent down payment on their home.
The Mortgage Company
Your mortgage company is willing to give you a loan even though you haven't come up with the typical down payment for your home
. With PMI, in the case that you default on your loan, it offers additional protection to your lender in case you would default on your loan. With a PMI contract, your monthly or annual expenses will be larger. Basically, it's a precautionary measure for the lender.
This is one of the reasons it is a good idea to come up with a standard down payment before you buy a home
with a traditional mortgage. While it's not the only reason to wait to buy a home, it is one that many people don't consider. Private mortgage insurance usually costs between 0.5% to 1% of the whole loan amount on an annual basis. For example, on a $100,000 loan, the homeowner could be paying as much as $1,000/year, or $83.33/month – assuming a 1% PMI fee. That is a hefty feel to add to your home mortgage payments
; it's definitely something worth considering when buying a new home.
When you loan balance falls to 78%, your lender will cancel your PMI. While this may take awhile, it's worth it to keep track of your payments. When you find your loan balance is 80% of the home's original value, contact your lender and ask them to stop the insurance premiums. If, however, you purchased you home through FHA, the mortgage insurance premium won't be cancelled. However, you can eliminate the premium if you refinance your home. As you can see, it's important to understand PMIs. With this additional knowledge, you can decide rather or not you want to pay the extra money or if you'd rather wait to have the 20% downpayment on your new home