Many a first-time homebuyer has grumbled about paying private mortgage insurance. This article discusses the subject of private mortgage insurance, also known as “PMI.”
Private Mortgage Insurance
Unless the owners are insane, every business in the United States carries some form of insurance to protect against losses. The various lending institutions that issue Nashville home loans, equity lines, and refinances to borrowers are no different. The insurance they carry is private mortgage insurance.
Private mortgage insurance protects a lending institution from losses if you default on your home loan and your home goes into foreclosure. Essentially, the lending institution is going to be covered for any shortages between the cost of liquidating the home and the amount of the loan. This is of particular importance to a lender when the housing market pulls back from high valuations. In such a pull back, it is not uncommon to see the total mortgage balance exceed the value of the home. Obviously, this makes lenders uncomfortable.
PMI – Premiums
Most homeowners understand the need for private mortgage insurance. The grumbling starts, however, when they find out who has to pay for the insurance. Yep, you the homeowner are on the hook. As the homeowner, you are paying for insurance that will protect the lender if you default. While this may not seem fair, keep in mind the lender is giving you a rather sizable chunk of money. If you are still grumbling, there is a way to avoid paying mortgage insurance.
The 20% Down Rule
If you accept a home loan, the 20% figure will become an extremely important figure. Why? 20% is a magic figure in the world of Nashville home loans and mortgages. If you make a down payment of 20%, you are not required to obtain or pay for private mortgage insurance. With PMI premiums running $1,000 or more a year, it makes sense to make a 20% down payment if at all possible.
What if you can’t scrape together 20% of the home value for the down payment? Well, you’re stuck paying PMI, but not forever. Once your equity in the home reaches 20% of the valuation, you can cancel the PMI. Keep a close on your equity as lending institutions are under no duty to tell you when the magical 20% figure is reached. Oddly, they almost never seem to remember!
Private mortgage insurance is expensive, but you can avoid it with a sizeable down payment. If you do not have that much money on hand, try to keep in mind your home in Nashville is an investment and the home loan gives you the ability to buy it.