Private mortgage insurance (PMI) is a type of insurance meant to protect people or companies that hold a mortgage. This type of insurance is often required of lenders who don’t have sufficient equity in their homes, from property value loss, borrowing against present equity, or when first purchasing a home. The exact percentage at which a borrower will demand a homeowner purchase PMI may vary from place to place. Often, if no more than 8% of equity is owned, people can end up paying several hundred more dollars a month to purchase and hold this insurance, and may not get rid of these payments until their equity amount climbs, either through speedy payments or increase in home value.
Usually, a loan of a certain percentage is extended only on the condition that the borrower pay private mortgage insurance, and it should be very clearly understood exactly who is protected by this payment. People might wonder, for instance, why the huge foreclosures in the late 2000s weren’t prevented as a result of PMI. The answer to this is simple: the protection occurs after foreclosure to the lender.
PMI doesn’t protect borrowers ever; it simply gives them the right to enter into a mortgage deal with a lender. Moreover, the mass number of foreclosures in the late 2000s apparently severely strained those companies that carry this mortgage insurance, making it difficult or impossible to pay on all home loans on which PMI was carried. Yet, it’s noted that many of these companies still have a thriving business.
There is considerable amount of advice on how to avoid paying private mortgage insurance, and this advice can vary. Many financiers suggest that it is far better to have two mortgages so that neither lender can demand PMI. In the financial climate existing after all of the late 2000 foreclosures this may not always be possible. Yet there still are some programs, particularly for first time buyers, which might be of use.
If people must pay private mortgage insurance, the next advice is try to get rid of it quickly by paying additional payments to the principal of the loan. Once people pass a certain threshold, they shouldn’t have to pay it anymore. Higher payments may help get there sooner, as can changes in property value. With a sudden shift up in housing values, a person might suddenly hold great equity than expected. Appraisal of the home and verification of this could be submitted to the bank to end these payments.
One other thing about private mortgage insurance that is useful to know is that it isn’t always the same in price. Lenders can require it but they usually can’t require a specific insurer from which to obtain it. To this end, before people take out a loan, they should price-shop for PMI, and possibly engage in a small amount of bargaining with insurers. It might be possible to save money each month with a little bit of comparing first. It should be remembered that these insurers want the business, and some may be willing to deal to get it.
