Loan intermediaries

PRIVATE MORTGAGE INSURANCE

Private mortgage insurance (PMI) is one of a number of approaches to minimizing your upfront costs when trying to buy a home. This type of insurance allows you to pay less than the usual 20 percent as a down payment. This can be beneficial to many homebuyers.

Young or first-time homebuyers are better able to afford a mortgage even though they have not had the time to save for a major deposit for their first home. There are definite investment and tax benefits of home ownership that can be appealing to buyers at all stages.

Private mortgage insurance is a form of insurance that can be used to pay the mortgage if the owner is unable to pay, or ends up defaulting on their loan. PMI is an important protection for the lender, since it is they who are taking a larger risk when they approve a borrower who has less upfront equity. It is a proven fact that lenders have learned (by both research and experience) that the more equity a borrower can supply at the beginning, the less likely it is for them to default on their loans later.

Generally speaking, the costs for PMI are based on the loan amount. That means that the larger loan you take out, the more PMI coverage you will have to pay. Moreover, vice versa. The lower your loan amount, the less coverage that will be required.

There are definite time limits on how long you will be required to pay for private mortgage insurance. For instance, in 1998, the Homeowners Protection Act established provisions for any mortgages that were signed on or after July 29, 1999 to terminate PMI automatically upon reaching the 22 percent equity on the home. Homeowners in these situations can also cancel their PMI coverage, once 20 percent equity has been reached. Homeowners can also request for removal of private mortgage insurance coverage, if you obtain 20 percent equity on a mortgage signed after July 29, 1999.

Keep in mind that there are some exceptions to the provisions in the Homeowner’s Protection Act. Some loans are exempt from the 22 percent rule, based upon certain conditions. This might include negligent or late payments, high-risk loans, or if the owner has liens on the property.