What is Private Mortgage Insurance?

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If you’ve begun looking into getting a mortgage, you’ll notice that mortgage payments contain several components. While you need to pay down the debt itself, you also have to pay down the interest. However, loans typically involve private mortgage insurance as well. Lenders usually require private mortgage insurance when they offer a conventional loan, and it’s important to understand this element of your mortgage before you try to buy a home.

When is Private Mortgage Insurance (PMI) Necessary?

While private mortgage insurance is involved in most mortgages, it’s not necessarily required. If you make a 20% down payment, you’ll often be exempt from private mortgage insurance. Likewise, you might not have to pay for PMI if you refinance your mortgage and have over 20% equity. This is because private mortgage insurance steps in to cover the losses if you miss your mortgage payment.

However, it’s important to clarify that private mortgage insurance doesn’t cover you. Rather, it covers the lender and will pay out to them if you start to miss payments. You’ll still owe the lender, and failing to make your payments can result in losing your home through foreclosure. With this in mind, it might seem like you have no reason to pay PMI since it only benefits the lender. However, this can help you secure a mortgage you might not otherwise get.

The Purpose of Private Mortgage Insurance

When you pay for private mortgage insurance, your loan becomes much less risky for the lender. On the other hand, things such as offering a low downpayment or having an atypical employment history make your loan riskier. As such, PMI is a useful way to offset any risks that you might present a lender and improve your prospects for getting a good mortgage with favorable terms.

How Do I Buy Private Mortgage Insurance?

The lender arranges a private mortgage insurance plan, not you. Once they choose the plan they want, the cost passes down to you. There are three ways to pay for private mortgage insurance:

  • Up-front, one-time payment at the time of your mortgage loan
  • Monthly premium that the lender adds onto your mortgage payment
  • Combination of up-front payment and monthly premium

The exact amounts will vary depending on the amount you intend to borrow, the size of your downpayment, and other factors. Sometimes, you can opt for a mortgage that has no PMI and has higher interest payments. There’s no single right answer as to whether or not you should choose private mortgage insurance or higher interest payments.

Sometimes one choice is more economical, sometimes the other is better, but it’s often close and unclear. If you need more help finding the most efficient, reliable choice of mortgage to buy your home, get in touch with Potempa Team.

Find the Ideal Mortgage with Potempa Team

Everyone’s circumstances, goals, and resources vary when it comes to taking out a mortgage and buying a home. However, Potempa Team has a vast breadth of experience in setting people up to succeed by guiding them to the right mortgage decisions. Reach out today to learn more or have any questions that you need a reliable, authoritative answer to.

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