For many home buyers, private mortgage insurance may not be the most celebrated form of insurance, but, for some, it’s an absolute must. For those individuals who wouldn’t typically be able to afford a large 20 percent down payment, it’s a “foot in the door,” allowing for home ownership with as little as a 0-5 percent down payment.
Private Mortgage Insurance (PMI) is insurance that protects your lender against non-payment should you default on your loan. It’s important to understand that the primary and only real purpose for mortgage insurance is to protect your lender—not you. As the buyer of this coverage, you’re paying the premiums, so that your lender is protected. PMI is often required by lenders due to the higher level of default risk that’s associated with low down payment loans. Consequently, it’s sole and only benefit to you is a lower down payment mortgage.
How much does it cost?
The average costs of mortgage insurance premiums vary, but typically they fall between one-half and one percent of the loan amount, depending on the size of the down payment and loan specifics. On a $200,000 loan with a $10,000 down payment, you might expect to pay somewhere around $85 a month, or about $1000 a year, in addition to your mortgage payment. Unlike your mortgage interest, these premiums are not tax deductible. Mortgage insurance is one of the few types of insurance products that doesn’t underwrite it’s premiums based on individual default risk, rather the size of the borrower’s mortgage and the amount of money put down determine the mortgage insurance quote. So, two individuals regardless of credit with the same mortgage amount and down payment can expect to pay about the same PMI premium.
Private Mortgage Insurance and Mortgage Protection Insurance
Private mortgage insurance and mortgage protection insurance are often confused. Though they sound similar, they’re two totally different types of insurance products. Mortgage protection insurance is essentially a life insurance policy designed to pay off your mortgage in the event of your death. Whereas, private mortgage insurance protects your lender, allowing you to finance a home with a smaller down payment. These two products should never be construed as substitutes for each other.
Canceling or Terminating PMI
So, you don’t like the idea of making those extra mortgage insurance payments?
Here are a few ways to eliminate mortgage insurance altogether:
- Pay down your mortgage
- Piggyback loan
- Automatic termination