Private mortgage insurance, do you really need it

Private mortgage insurance, do you really need it. Buying a home is such an expensive operation you are sure to want to reduce costs as much as you can. This means you will probably not want to pay for fees you don’t really need. This is the generally feeling with Private Mortgage Insurance, borrowers would prefer not to pay them. However many people end up paying them regardless. In some countries they are even required by law. Why do people pay them and why are they required by law? What are private mortgage insurances? What are the benefits? Should you pay for them and if so, when? This article aims to answer these questions by giving a broad overview of Private Mortgage Insurances.

What is private mortgage insurance (PMI)?

Private mortgage insurance is an insurance that protects the lender in case the borrower of a loan or mortgage does not pay the loan. It is important to note that this protects the lender not the borrower. Private mortgage insurance is often required in order for a loan to be approved. This is especially the case in loans where the down payment is larger lower than 20 % of the price of the home.

How much do they cost?

Private mortgage insurance like all insurances varies in the prices depending on the company, the amount insured and the credit history of the borrower. A typical amount is one half of one percent of the amount borrowed. For example if you were to buy a home for 100,000 $ and paid a down payment of only 10,000 $ (10 %) you would pay 90,000 (the amount of the loan) multiplied by 0.005 (0.5%) which equals 450$. The 450 fee is then divided by the twelve monthly payments.

Why do I need Private Mortgage insurance?

Private mortgage insurance is often required for a) loans where the down payment is lower than 20 % and b) for high risk borrowers with a bad credit.

It is actually a legal requirement in some countries and states to contract a Private Mortgage Insurance so you might have to pay them. However the law online requires it when the down payment is below 20 %. Keep track of the capital you pay off your mortgage and make sure you notify your lender when it hits the amount paid hits 20 % of the capital. You are then no longer required to continue payments.

Alternatively you might consider the benefits of Private Mortgage Insurance. If you happen to die, your family will not be lumbered with a large debt they may struggle to pay.

How can I avoid paying a Private Mortgage Insurance?

There are various ways to avoid paying private mortgage insurance which we will discuss in more depth in future articles. An easy solution that can actually save you money is to take on two loans. This solution works if you can put a down payment of 10 % or more. The first mortgage will cover the 80 % of the capital, you then contract a loan for 10 % of the loan and pay the pending 10 % (or whatever you can afford) with your down payment.