The Downside of Private Mortgage Insurance By Mauricio Navarro

Now, some of you may look at “private mortgage insurance”. However, when it comes to private mortgage insurance (PMI), that thought is only partially correct; as a homebuyer with a non-conventional mortgage, you will need to pay private mortgage insurance but the PMI but the insurance is not for your benefit; it’s for the benefit (and protection) of your mortgage lender. PMI does have its merits but if you can avoid paying PMI, try. Here are the three top reasons why:

DOWNER #1: No Benefit For The Family: If something happens and you’re not able to make mortgage payments, your family gets nothing from the private mortgage insurance company; no grace period and no payout of monies paid into the PMI. What’s more is that, if your family is unable to keep up with the mortgage (and PMI) payments, you / they will lose the home.

DOWNER #2: It’s Like Being Tethered To A Ball & Chain:
PMI isn’t something that you can just stop making payments on when you don’t want the service anymore; if you have to pay PMI, then it’s a requirement of your mortgage. Additionally, once you’ve satisfied the PMI-related terms of your mortgage, you’ll still have to cut through your lender’s PMI company’s red tape in order to cancel the PMI. Translation: You can’t de-shackle yourself from PMI until your lender / PMI company releases you.

DOWNER #3: The Opportunity Cost Is High:
A home is an investment but the money you spend paying PMI is just that, a payment. For comparison’s sake, presume that a mortgage you were interested in required a $1,500 annual PMI payment. Well, that payment would simply be money spent once it was paid.

What is Private Mortgage Insurance?

Private mortgage insurance works a bit differently than other forms of insurance like health or life insurance. Investopedia.com defines private mortgage insurance, which is sometimes abbreviated as PMI, as “A policy provided by private mortgage insurers to protect lenders against loss if a borrower defaults.” Yes, you read that correctly; private mortgage insurance is insurance coverage for your mortgage loan provider on which you pay the premium. The second major difference between private mortgage insurance and many other forms of insurance is that PMI is not optional. Though many aspects of your mortgage loan may be negotiable, PMI typically is not; it’s usually a condition on unconventional loans.

Generally, PMI is added on to the cost of your loan. Scenario:
Home price – $220,000
Down payment – $22,000 (which is 10%)
Fixed interest rate – 6.75%
Loan term – 30 years

With health insurance, life insurance, car insurance, etc., you can cancel anytime you wish. That’s not the case with private mortgage insurance. With PMI, you must pay the premium until you have paid at least paid 20% of the mortgage principal back; some lenders who make loans to “high-risk” buyers may require PMI until up to 50% of the principal has been paid. Learn more here for Home Mortgage Rates, Best Mortgage Rates, 97% Of American Homeowners Overpay Their Lender In Mortgage, A Personal Mortgage Experience, Subprime Mortgage Rates, Adjustable Rate Mortgage.