Private mortgage insurance helps home buyers purchase homes with less than twenty percent down but, despite its benefits, some consumers aim to avoid their PMI at all costs. While the idea of getting a house of your own seems promising, getting your home sweet home may sometimes require you to get mortgage insurance. That’s why it’s a good idea to avoid PMI when buying a home. It’s an extra cost, and it’s not something that’s necessary to have on your mortgage. But before we get into the details of what you can do to prevent this kind of expenditure, let’s find out what mortgage insurance is first.
What Is Mortgage Insurance?
PMI stands for private mortgage insurance. It’s an insurance policy your lender will take out to cover a portion of the amount you borrow in case you ever default on your loan. If the borrower of the house loan dies or if a natural caused has kept the borrower from paying the credit in the full amount, mortgage insurance will be responsible for paying up for the remaining balance.
This means if you stop paying what you owe on your mortgage and the lender forecloses on your property and suffers a loss, the insurance company will pay out a claim to the lender.
A final option is lender-paid mortgage insurance (LMPI) where the cost of the PMI is included in the mortgage interest rate for the life of the loan. Therefore, you may end up paying more in interest over the life of the loan.
Most of the time, mortgage insurance firms require their clients to pay monthly. This means your overall payment will be divided into 12 monthly installments.
How Much Does It Cost To Get Mortgage Insurance?
The cost of private mortgage insurance (PMI) is based on the loan amount, the borrowers’ creditworthiness and the percentage of a home’s value that would be paid out for a claim.
It’s important to note that your mortgage loan rate can range from 30 to 115 basis points annually. Aside from your down payment, your credit score and loan term are also determinants of your mortgage loan rate.
If you’re looking for ways to avoid PMI on your first home purchase, there are a variety of methods out there, but beware that many of these might actually cost you more in the long run.
Make an Informed Decision
There’s no right answer when it comes to how much you should put down on your mortgage.
If you have enough for a 20 percent down payment, you won’t have to worry about the cost of PMI. But if you don’t have enough, it’s important to know how much it will cost you on a monthly basis and over the long run — or to know the alternatives available.
For your specific situation, use an online PMI calculator to find out how much it will cost you. Knowing those figures will help you make a more informed decision for your mortgage.