Private Mortgage Insurance: What Is It and Why Do You Have to Pay It?

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When purchasing a home, there are many different expenses that will need to be hashed out. Many first-time homebuyers are surprised by these expenses, as they assume the only cost to purchasing a home is the price that is listed or the price that is agreed upon after negotiating with the buyer. In reality, there are several other costs that need to be taken into consideration. One of the costs that causes the greatest amount of confusion among homebuyers is PMI. So, what is PMI and why do you need to buy it?

What is PMI?

PMI, or Private Mortgage Insurance, is a type of insurance coverage that most homebuyers must pay if they put down less than 20 percent on the home. The insurance coverage protects the lender by paying a portion of your mortgage loan if you default on your loan.

Why Do You Need to Purchase PMI?

Since PMI does not provide you with any personal protection, it is only natural to wonder why you need to purchase it. The reality is that PMI insurance is not for you. Rather, it is put in place to protect the lender from the risks involved with approving your loan. If purchasing PMI coverage is required by your lender, you have no choice but to purchase the coverage or to come up with a larger down payment. The good news is that you do not need to keep paying PMI throughout the lifetime of your loan.  Once you have paid down your house so you owe less than 80% of the home’s value, you should be able to discontinue the coverage. According to Federal Law, lenders must automatically cancel PMI coverage once the amount you owe versus the value of the home reaches 78%.

How Much is PMI?

The coast of PMI coverage varies according to the size of your down payment and the amount of the loan. In general, the cost ranges anywhere from 0.3 to 1.15 percent of the original loan amount. For example, if you purchase a home for $200,000 with a 10 percent down payment, the amount you are actually borrowing is $180,000. If your PMI is set at a rate of .5, the insurer will multiply this 0.005 by the amount you borrowed, resulting in an annual cost of $900. This will then be divided by 12 to result in a monthly payment of $75. This cost is then added to your monthly mortgage payment amount.

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