Categories: Real Estate

Private Mortgage Insurance Explained and How You Can Get Rid of It!

When it comes to making real estate purchases, often time’s people really want to buy a home without having a decent down payment. People are starting families and need a place or live, or just cannot wait until they can save up a decent amount of money for a down payment. In the old days, these people would just not be qualified for mortgages, now through the use of private mortgage insurance, people with little or now down payments can now get into homes.

Quite often people purchase a home only to realize they cannot afford it; they end up getting behind and foreclosed on. The bank then has a house on their hands and when they sell it they often do not make enough to cover the cost of the loan because foreclosed homes are usually sold wholesale and are sold at a discount. Often the homes which have been foreclosed on because the owner no longer owns it and often leaves it in a mess when they do eventually get evicted.

Banks and Mortgage Companies have decided that they had enough of losing money. They gave customers who wanted mortgages two options. The first is that they can give at least a 20% down payment on their home. This way if the home gets foreclosed on the bank believes that they can at least get 80% of their money bank and with the 20% down payment they will not lose any money on the sale.

The other option for customers who cannot come up with a 20% down payment, have to pay for what is called private mortgage insurance (PMI). In some areas, PMI is also called lender’s mortgage insurance (LMI). Banks almost always require you to pay for PMI if you do not have a 20% down payment, otherwise they will not give you the loan. If you have PMI and get foreclosed on, the bank will sell the house for whatever they can get for it, and then the insurance company will cover the difference that the bank was not able to make on the house. This way the bank will not lose money.

Private mortgage insurance costs about $50 per month for every $100,000 of mortgage that you have. So if you had a $150,000 you would have to pay $75 a month for the insurance. You can eliminate your private mortgage insurance by having at least 20% equity in your home. You can figure out what your equity percentage is by having a professional appraisal done by a company which is approved by your mortgage company. The appraisal will probably cost about $300. If your mortgage balance is less than 80% of the appraisal, then the mortgage company is required by law to drop the private mortgage insurance.

You can get more equity in your home in two ways, you can either pay down the mortgage by giving the bank extra principal payments which is always a good idea, or if your home appreciates in value, you will also gain equity in your home. In most cases it will be a bit of both which allows you to drop PMI.