The Need-To-Knows Of Private Mortgage Insurance
Everyone knows that buying a home is an expensive process. Just how expensive it is depends on how big of a home you want, where you want it, your loan amount, and how much of a down payment youre willing to contribute. The traditional down payment amount is around 20 percent of the homes value, which is a lot. So, many people (especially those with FHA mortgages) put down less. However, if you put down less than 20 percent on your mortgage, you might be stuck with yet another payment. Its called Private Mortgage Insurance (PMI).
PMI is not your run of the mill home insurance plan. In fact, its not a conventional home insurance plan at all, really. Its designed to protect the lender if you default on payments. You make the payments and the lender is the beneficiary. If you are thinking of putting less than 20 percent down for your new home, make sure you know all the ins and outs of PMI.
SEE ALSO: The Essential Guide To A FHA Mortgage
Types Of PMI
Though you cant choose whether or not you get PMI, you can choose what type of PMI you get. There are two main types available to you: government and private. Governmental PMI is available through the Federal Housing Administration (FHA), while several corporations provide underwriting for private PMI. If you do not choose a PMI from either of these sources, your lender will choose for you.
Cost Of PMI
The cost, too, ranges on PMI, depending on your credit, loan amount, and what type of PMI you get. PMI can range in price from .3 percent to 1.15 percent of the loan amount per year. To give you an idea of just how much that is, on a $200,000 loan, a PMI plan of one percent would mean $2,000 in payments a year. Thats $166.67 per month. This is in addition to your regular mortgage payments each month.
Should You Get PMI?
The only real option you have when it comes to getting PMI is whether or not to pay 20 percent or more down. If you have the means to pay 20 percent or more as a down payment on your home, you should. Paying into PMI will not benefit you in any way. All the money goes towards protecting the lender, which does absolutely nothing for your own financial well-being.
That being said, there are ways to avoid PMI, even if you dont have 20 percent to pay down. Other than getting a smaller house, you can take out an 80-10-10 mortgage, otherwise known as a piggybank mortgage. This plan allows the buyer to take out a mortgage for 80 percent of the homes value, make a down payment of 10 percent, and take out a loan for the last 10 percent.
Removing PMI From Your Mortgage
Seeing as PMI doesnt benefit you, youll probably want to stop paying it as soon as possible. To do so, youll need to keep track of your loan-to-value (LTV) ratio. The LTV ratio is the difference between the amount left on your loan and your homes value. Once your LTV ratio reaches below 80 percent, you no longer have to pay PMI. At that time, you should contact your lender and have it taken off your mortgage payments.
If your mortgage lender does not remove the PMI payment in a timely manner, send written complaints to them by snail mail and email and keep a copy for yourself. That way, you have proof of your complaint should you have to take your claim to court. Continue paying your PMI until you receive a response, though, or it might complicate the issue further. If you have, indeed, overpaid, then your lender will need to refund you the money or apply it to your principal.
SEE ALSO: The Late Payment Timeline
Though paying it depletes you financially, PMI is what allows many Americans to pursue part of the American Dream. Knowing what to expect with it will make paying PMI and making ends meet that much easier.