PMI stands for Private Mortgage Insurance.
It’s a well-known fact, that in order to get a mortgage, you will have to make the first payment (down payment) which is 20% of original home’s value. What if you don’t have that needed amount to make the first payment? Lenders consider such borrowers as of a higher-risk league and so every lender tries to protect his interests. If later you will fail to repay the home’s loan, the lender will take a significant loss.
You should realize that PMI does not protect your house like the homeowner’s insurance does. PMI insurance is purposed to protect the lender and it’s you who is paying for this protection. It may sound weird, but still, it’s beneficial for the borrower to pay for Private Mortgage Insurance. Below we will take a closer look.
Only in a case your loan is backed by the Government, the lender does not require the borrower to buy PMI (because in this case the Government protects the lender from you failing to make a loan’s repayment).
There are two types of Mortgage Insurance: Insurance paid to the Insurer and Insurance paid to the lender directly (LPMI). In some cases the cost of insurance is already inbuilt in the cost of the loan, while in other cases you pay the PMI premiums just like you would do it for any other type of insurance.
What are the benefits of getting a PMI?
Despite PMI is covered by the borrower in the interest of a lender, there are several essential benefits of it.
- The borrower gets the mortgage having no enough money to make a down payment.
This is the biggest benefit and a reason why lenders require borrowers to buy a PMI. The down payment is an obligatory requirement and it is usually 20% of the total cost of the house. PMI allows borrowers get the mortgage having no money for making full down payment and PMI guarantees a financial protection to the lender in case of foreclosure.
- More flexible payment options.
The lender gives a borrower more flexible and more customized repayment options, as financial interests of the lender are backed by PMI insurance.
- PMI is Cancelable
Unlike the other mortgage insurance types where the premiums are rolled in the total cost of the loan, PMI Insurance can be canceled when borrower’s payments reach 20% level of the home’s value. This level can be reduced if somehow the market home’s price increases (or the mortgage owner made significant interior or exterior improvements).
- Wider choice of mortgage lenders.
If the lender is protected by the PMI he considers you a less risky borrower (even if you don’t have needed 20% to make a down payment). Thus, you will have a significantly wider choice of lenders willing to give you a home loan. That means you may choose from the variety of terms, interest rates, repayment options and so on.
The cost of PMI varies significantly, depending on several factors. In average, you will pay 0,5%-1.15% of the total amount of your mortgage loan. You will make monthly payments to the Insurer like you would do for any other type of insurance. Also, the cost of your PMI and the premiums you will pay depends on the initial amount of money you have to make a partial down payment. It means, your PMI will cost you more if you only have 5% for down payment comparing to 15% which is nearly the whole down payment amount required.
Cancel your PMI when it is not needed anymore
If the cost of your Insurance is not inbuilt in the total cost of the loan, you may cancel it as soon as your summarized payments to the lender have reached 20% of the home’s value (of the loan’s amount). Some lenders allow PMI canceling at the 20% level, some not, but when your payments reach 22% it becomes obligatory for a lender to cancel your PMI insurance. When you have reached your 20%, the interests of the lender are already backed even in a case the situation will go into foreclosure.
Anyway, you may not buy a PMI Insurance at all and still get a mortgage but on way less favorable terms.
What if you do not buy Private Mortgage Insurance?
- You may choose another option to get your mortgage insurance without paying premiums to the Insurer. It is called LPMI where your “premiums” are simply rolled into the total cost of the mortgage loan. In other words – the lender gives you a home loan with higher interest rate. It only seems that you don’t pay the premiums, but the lender will never give you his money without protecting himself in all ways possible. Take a note that LPMI is not possible to cancel like PMI, so your payments under LPMI will last a loan’s lifetime.
- You may get another loan (so-called piggyback loan) somewhere else to have a full 20% amount for making a down payment for mortgage, so you will not be required to buy a PMI. Anyway, if you are after beneficial mortgage terms and lower interest rate, consider buying PMI as a temporary tool for getting a bank loan. By giving the lender certainly and making him see you as a reliable borrower, you make yourself a great favor.