If you are taking out a mortgage loan to help pay for the cost of purchasing a home, you will find that there are many extra costs associated with buying a home. One of these extra expenses comes in the form of Private Mortgage Insurance, or PMI. While PMI is not always a requirement, there are certain situations where you will be required to obtain PMI insurance. Whether looking to purchase Lake Austin real estate or a home in Denver, it is important to learn more about what this insurance is and why you need to have.
What is PMI Insurance?
In short, PMI insurance is a form of insurance that protects the lender if you default on your loan. Therefore, despite the name, PMI is not a form of homeowners’ insurance and it does not protect the buyer in any way. Rather, it is a type of insurance that mortgage lenders require you to purchase in order to protect their investment. If you default on your loan, the PMI will only protect the lender’s interest in the property and will not provide you with any type of assistance or protection.
Why Do I Need PMI Insurance?
While PMI insurance does not provide you with any form of protection, you will need to purchase it in order to fulfill your lender’s requirements. In general, PMI coverage is only required when the buyer has a down payment that is less than 20 percent of the selling price of the property. Therefore, you can avoid this extra expense by saving up a larger down payment and satisfying your lender’s requirements. Another way to avoid the PMI requirement is to obtain a loan through a program that is backed by the government, such as an FHA or VA loan. A third option is to obtain a piggyback loan. Also referred to as combination financing, taking out a piggyback loan involved taking out one mortgage to cover 80 percent of the loan and then taking out a second loan to cover the remaining expense.
What are the Benefits to Having PMI Coverage?
Since PMI insurance only protects the lender’s investment, the only benefit it provides to the buyer is that it makes it possible to purchase a home with a down payment of less than 20 percent. On the other hand, carrying PMI coverage does increase the buyers’ monthly mortgage payment and the cost is not tax deductible.
How Long Do I Need to Carry PMI Coverage?
Most lenders require buyers to continue to carry PMI until the mortgage has been paid down to a certain level. In most cases, lenders will allow the PMI to be cancelled after the principal balance of the mortgage loan has fallen to 80 percent of the Loan-to-Value. In other words, the amount owed on the loan must be 80 percent or less of the assessed value of the home.
About The Author – Eric Bramlett is broker of One Source Realty and specializes in Apache Shores Austin and Lake Austin real estate.
