subject: What is private mortgage insurance? [print this page] What is private mortgage insurance?
If you've been preparing to buy a house, you are probably already aware of the many costs involved including real estate commissions, loan origination fees, and of course, a big down payment. However, depending on your particular loan, you may be required to spend some extra money and obtain private mortgage insurance, which protects the lender in case of your default.
Ideally, you should have saved approximately 20% of your home's purchase price, as this amount would provide an adequate down payment for most mortgage lenders. This protects the bank or other lender in case you are unable to continue paying your mortgage and end up foreclosing. Of course, no one likes to think about these scenarios, but let's face it -- this possibility has become reality for far too many people (especially during the real estate bubble burst of the late 2000s).
The lender could easily lose money if the buyer puts down less than 20% for a down payment and then defaults on the loan after property values have dropped several percentage points. Lenders, of course, hate these kinds of outcomes, especially when you factor in the expense and hassle of having to sell this property themselves. This is where private mortgage insurance comes in.
If you put down less than 20% of the purchase price as a down payment, you will likely be required to purchase private mortgage insurance to protect the lender. The costs will probably be around several hundred dollars per year in addition to your mortgage payments themselves. If your home is particularly expensive (perhaps a few hundred thousand), your mortgage insurance could well add more than $1000 per year on top of your mortgage payments.
This is unfortunate, especially when you consider that making a small down payment could already cause you to get higher interest rates or force you to pay more initial fees. The good news is that your private mortgage insurance will not be required forever. Once you have paid down 20% of the loan, you longer need to pay for this particular insurance plan. In addition, you can drop your PMI (as it's often called) if you have obtained at least 20% equity through any combination of appreciation, home improvements, or simply paying down your loan.
It's always best to avoid these types of additional fees if at all possible, so keep in mind that 20% down payment is preferable. Perhaps you're close to having this amount saved, but you're just not quite there yet. It may be worth waiting for a little while longer in order to secure a larger down payment and avoid extra obligations like private mortgage insurance.
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