Private Mortgage Insurance
The Private Mortgage Insurance is usually referred to by its acronym PMI. A PMI is a company that is privately owned and offers mortgage insurance.
When the homebuyer obtains a loan that is more than 80% of the value of the new home, the lender makes it compulsory for the borrower to avail the services of PMI and get an extra insurance. Payment of PMI becomes compulsory for those buyers who cannot arrange for even 20% of the down payment.
PMI plays a very vital role in the mortgage industry. It protects the lenders from financial losses that could result from the borrower committing defaults on repayment of loan. At the same time the PMI facilitates the borrowers who have less cash to increase their chances of owning a property. With the services of the PMI at hand one can buy a home even with availability of 3% to 5% of the down payment. This means that the borrower does not have to wait till he accumulates the amount needed for down payment.
The PMI protects the financial interests of the lender not the borrower. PMI is an antidote to a default committed by the borrower. It is for the protection of the funds of the lender. Moreover the premium of this insurance is to be paid by the borrower not the lender. The only advantage of the borrower is that the payment mortgage is lowered down.
The borrowers are facilitated with both special affordable and standard programs. The lenders are provided guidelines about determining the eligibility of the borrower. The PMI’s usually adhere to stricter and stringent qualifying ratios. The down payment that is required for PMI is larger than that required in case of FHA but at the same time the premium is usually lower in comparison to that of FHA. The PMIs insure loan that go beyond the limits of FHA.
The cost of Private Mortgage Insurance varies from company to company and from situation to situation. Usually the cost of PMI ranges between 1.5 to 1% of the total loan amount. This depends on the loan specifics and the amount of down payment. If the loan is of $200,000 and the down payment is $10,000 then most probably the cost of the PMI could be approximately $1000 a year. The mortgage payment is additional. The mortgage interest is always tax deductible but he PMI premiums are not always tax deductible.
The underwriting in PMI is not based on individual default risk. The mortgage insurance quote in PMI is determined by the amount of down payment and the size of the borrower’s mortgage.
