Private Mortgage Insurance or PMI, as it is often referred to, reimburses the lender in the event that the homeowner defaults on a mortgage loan. Although Private Mortgage Insurance is paid for by the borrower, it ultimately protects the bank or lender funding the mortgage. Why then would your basic borrower choose to get PMI when they apply for a loan? There are several reasons that PMI is a smart choice for a borrower.
First, it allows the borrower to submit low down payments or no down payment at all. The typical down payment required when purchasing a home is 20% of the purchase price; however, not every borrower has that amount of funds available. Therefore, lenders allow borrowers to take out loans with less than 20% down by requiring PMI to be purchased with the loan. This makes purchasing a home more affordable for your average borrower. It has become an invaluable asset to the economy by allowing many Americans to attain the dream of owning their own home.
Second, PMI is not required to be kept on the loan for the life of the loan. As required by Federal law, the lender must automatically remove the PMI once the loan value reaches 78% of the home’s original value. For example, if the home is valued at $100,000 and the borrower now owes $78,000 to their lender, the lender will remove the PMI automatically. If a borrower would like to speed up the removal of the PMI, the borrower can request the PMI be removed once the loan value reaches 80% of the home’s original value by contacting their lender. Consequently, this lowers the monthly mortgage payment due (if the borrower chose to escrow PMI in the monthly loan payment).
Third, PMI can be tax deductible. Based on choices made by the federal government each year, some years the IRS allows the amount paid for PMI to be tax deductible. Therefore, the borrower could get back most if not all of the money paid in each year for this coverage. As this may change each year, each borrower must check with their income tax representative to verify if PMI is deductible at that particular time.
Finally, PMI is not that expensive. PMI generally costs anywhere from .25% to 2% of your loan balance per year. The higher risk you are to the lender, the higher PMI you will pay and your risk is determined by your loan term, credit score, and down payment. However, the freedom of being able to provide a down payment of 0% to 19.99% greatly offsets the annual cost of PMI.
Overall, the purchase of PMI with a mortgage is not the death sentence that it may seem. Each borrower needs to be aware of all aspects of applying for and receiving a mortgage loan as every borrower’s situation is unique. Lenders are there to provide detailed pricing for each option available to the borrower in order to make the experience as educational and as easy as possible. Any questions a borrower has should be directed to their personal banker.