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Understanding PMI Or
Private Mortgage Insurance
PMI is required if the down payment on your new home
is less than 20%. You're indemnifying the lender from the possible eventuality
of you defaulting on the loan will enable you to purchase with very little
down.
Typically the charges for a PMI plan are around one-half of one percent
(0.005) of the loan.
So, an example would be: If you put down 10% or $20,000 on your new $200,000
dollar home the formula applied means that you will pay .005 percent on
$180,000 or $900. This being an annual charge the monthly payment calculates
out to $75 per month. More often than not a homeowner cannot raise enough
for the initial deposit and so they must secure the PMI and then they
must pay this cost until they have paid no less than a fifth of the initial
principal back. This can take years to accomplish.
Note:
When your LTV, loan to value ratio, reaches 80% you should notify the
lender that you no longer need to satisfy the requirements for PMI and
that you wish to stop paying the premiums. Laws that went into effect
in 1999 require lenders to inform the buyers at closing exactly how long
they will need to carry PMI before they achieve the 80% level required
to stop. This same law requires that the lender automatically discontinue
all PMI at 78%.
Keep in mind that the law will allow the lender to keep the PMI enforced
down to the 50% level if you fall into one of these high-risk categories:
- Reduced documentation loan
- Bad or questionable credit history
- High debt-to-income ratio
- Its an FHA loan (requires payment of PMI throughout the entire life
of the loan)
How To Avoid PMI:
- Pay more interest - from .75 percent to 1 percent, depending on the down
payment. The advantage is that mortgage interest is tax deductible.
- Secure an "80-10-10" loan and, again, there is the advantage of
mortgage interest being tax deductible.
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